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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 MARCH 31, 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 May 12, 2003 there were approximately 50,236,000 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 (Unaudited)               
|                                                                                              | Consolidated Statements of Income (Unaudited)         
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited)     
|                                                                                              | 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                                                                                   
|CERTIFICATION                                                                                
|EXHIBIT INDEX                                                                                



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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 -
     March 31, 2003 (Unaudited) and December 31, 2002                 |  |    | 3    | 
|                                                                                              | Consolidated
Statements of Income -
     Three months ended March 31, 2003 and 2002 (Unaudited)     |  |    | 4    | 
|                                                                                              | Consolidated
Statements of Cash Flows -
     Three months ended March 31, 2003 and 2002 (Unaudited) |  |    | 5    | 
|                                                                                              | Notes to Consolidated Financial Statements  March 31, 2003 (Unaudited)                             |  |    | 6    | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                     |  | 14 |     
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                     |  | 29 |     
|Item 4. Controls and Procedures                                                               |                                                                                                     |  | 29 |     
|Part II. Other Information                                                                    |                                                                                                     |  |    |     
|Item 1. Legal Proceedings                                                                     |                                                                                                     |  | 29 |     
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                     |  | 31 |     

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 future growth and
operating results, fee revenue, service fees receivable, critical accounting
policies and estimates, net operating loss carryforwards, payments to
OrthAlliance affiliated practices under incentive programs, allowance for
uncollectible amounts, capital expenditures, liquidity, capital resources, cash
needs, buy-outs of service, consulting and management service agreements,
pending litigation against OrthAlliance and the Company, advancement of funds
to affiliated practices, repayment of outstanding indebtedness and impairment
of goodwill. 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 conditions, 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, risks relating to the Companys foreign operations, changes in the
Companys operating or expansion strategy, inability of the Company to attract
and retain qualified 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.

2



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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)

|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |         |  |  | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------- | ----------- | ------- | ------------ | ------- |  |  | 
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         | March 31,   |         | December 31,
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         | 2003        |         | 2002        
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |             
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         | (Unaudited) |         |              |         | 
|                                                            |                                                                                                                                                                                                         |                            |                                      | ASSETS  |         |             |         |              |         |  |  | 
|Current assets:                                             |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |             
|                                                            | Cash and cash equivalents                                                                                                                                                                               |                            | $                                    | 12,126  |         |             | $       | 7,522        |        
|                                                            | Current portion of service fees receivable, net of allowance for uncollectible
amounts of $5,271 at March 31, 2003 and $5,095 at December 31, 2002                                                      |                            |                                      | 73,623  |         |             |         | 63,448       |        
|                                                            | Current portion of advances to affiliated practices, net of allowance for
uncollectible amounts of $2,661 at March 31, 2003 and $2,406 at
December 31, 2002                                             |                            |                                      | 14,580  |         |             |         | 14,857       |        
|                                                            | Deferred income taxes                                                                                                                                                                                   |                            |                                      | 28,685  |         |             |         | 37,572       |        
|                                                            | Supplies inventory                                                                                                                                                                                      |                            |                                      | 12,489  |         |             |         | 12,526       |        
|                                                            | Prepaid expenses and other assets                                                                                                                                                                       |                            |                                      | 7,120   |         |             |         | 7,439        |        
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|                                                            |                                                                                                                                                                                                         | Total current assets       |                                      |         | 148,623 |             |         |              | 143,364 | 
|Unreimbursed expense portion of service fees receivable     |                                                                                                                                                                                                         |                            | 44,605                               |         |         |             | 43,070  |             
|Advances to affiliated practices, less current portion, net |                                                                                                                                                                                                         |                            | 15,796                               |         |         |             | 15,687  |             
|Property, equipment and improvements, net                   |                                                                                                                                                                                                         |                            | 90,476                               |         |         |             | 90,060  |             
|Intangible assets, net                                      |                                                                                                                                                                                                         |                            | 218,270                              |         |         |             | 220,383 |             
|Goodwill                                                    |                                                                                                                                                                                                         |                            | 87,641                               |         |         |             | 87,641  |             
|Other assets                                                |                                                                                                                                                                                                         |                            | 11,589                               |         |         |             | 7,040   |             
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|TOTAL ASSETS                                                |                                                                                                                                                                                                         | $                          | 617,000                              |         |         | $           | 607,245 |             
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|                                                            |                                                                                                                                                                                                         |                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |             |         |              |         |  | 
|Current liabilities:                                        |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |             
|                                                            | Accounts payable                                                                                                                                                                                        |                            | $                                    | 6,424   |         |             | $       | 8,048        |        
|                                                            | Accrued salaries and other accrued liabilities                                                                                                                                                          |                            |                                      | 18,153  |         |             |         | 20,620       |        
|                                                            | Deferred revenue                                                                                                                                                                                        |                            |                                      | 537     |         |             |         | 713          |        
|                                                            | Service fee prepayments                                                                                                                                                                                 |                            |                                      | 5,296   |         |             |         | 7,743        |        
|                                                            | Current portion of notes payable to affiliated practices                                                                                                                                                |                            |                                      | 6,973   |         |             |         | 8,387        |        
|                                                            | Current portion of long-term debt                                                                                                                                                                       |                            |                                      | 10,415  |         |             |         | 8,333        |        
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|                                                            |                                                                                                                                                                                                         | Total current liabilities  |                                      |         | 47,798  |             |         |              | 53,844  | 
|Deferred
income tax liabilities                             |                                                                                                                                                                                                         |                            | 8,030                                |         |         |             | 8,030   |             
|Notes payable to affiliated practices, less current portion |                                                                                                                                                                                                         |                            | 3,683                                |         |         |             | 4,612   |             
|Long-term debt, less current portion                        |                                                                                                                                                                                                         |                            | 99,483                               |         |         |             | 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
51,318,000 shares issued and outstanding at March 31, 2003
and 51,268,000 shares issued and outstanding at December 31, 2002 |                            |                                      | 513     |         |             |         | 512          |        
|                                                            | Additional paid-in capital                                                                                                                                                                              |                            |                                      | 218,244 |         |             |         | 217,840      |        
|                                                            | Retained earnings                                                                                                                                                                                       |                            |                                      | 255,816 |         |             |         | 240,911      |        
|                                                            | Accumulated other comprehensive loss                                                                                                                                                                    |                            |                                      | (1,586  | )       |             |         | (1,376       | )      
|                                                            | Less cost of approximately 1,093,000 shares of treasury stock at March 31, 2003
and 1,097,000 at December 31, 2002                                                                                      |                            |                                      | (14,981 | )       |             |         | (15,027      | )      
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|                                                            |                                                                                                                                                                                                         | Total shareholders equity |                                      |         | 458,006 |             |         |              | 442,860 | 
|                                                            |                                                                                                                                                                                                         |                            |                                      |         |         |             |         |              |        
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                  |                                                                                                                                                                                                         | $                          | 617,000                              |         |         | $           | 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
|                                       |                           |                       |         | March 31,         
|                                       |                           |                       |         |                   
|                                       |                           |                       |         | 2003               |        | 2002
|                                       |                           |                       |         |                    |        |     
|                                       |                           |                       |         | (Unaudited)       
|Fee revenue                            |                           | $                     | 100,639 |                    |        | $    | 111,323 |       
|Direct expenses:                       |                           |                       |         |                    |        |      |         |       
|                                       | Employee costs            |                       |         | 29,301             |        |      |         | 31,827 |       
|                                       | Orthodontic supplies      |                       |         | 10,596             |        |      |         | 9,578  |       
|                                       | Rent                      |                       |         | 9,503              |        |      |         | 10,075 |       
|                                       | Marketing and advertising |                       |         | 6,242              |        |      |         | 8,950  |       
|                                       |                           |                       |         |                    |        |      |         |       
|                                       |                           | Total direct expenses |         |                    | 55,642 |      |         |        | 60,430 | 
|General and administrative             |                           |                       | 12,949  |                    |        |      | 14,404  |       
|Depreciation                           |                           |                       | 3,933   |                    |        |      | 2,815   |       
|Amortization                           |                           |                       | 2,728   |                    |        |      | 2,640   |       
|                                       |                           |                       |         |                    |        |      |         |       
|Operating profit                       |                           |                       | 25,387  |                    |        |      | 31,034  |       
|Interest income (expense), net         |                           |                       | (1,429  | )                  |        |      | (1,348  | )     
|Non-controlling interest in subsidiary |                           |                       | (14     | )                  |        |      | 23      |       
|                                       |                           |                       |         |                    |        |      |         |       
|Income before income taxes             |                           |                       | 23,944  |                    |        |      | 29,709  |       
|Income taxes                           |                           |                       | 9,039   |                    |        |      | 11,215  |       
|                                       |                           |                       |         |                    |        |      |         |       
|Net income                             |                           | $                     | 14,905  |                    |        | $    | 18,494  |       
|                                       |                           |                       |         |                    |        |      |         |       
|Net income per share:                  |                           |                       |         |                    |        |      |         |       
|                                       | Basic                     |                       | $       | 0.30               |        |      | $       | 0.36   |       
|                                       |                           |                       |         |                    |        |      |         |       
|                                       | Diluted                   |                       | $       | 0.30               |        |      | $       | 0.36   |       
|                                       |                           |                       |         |                    |        |      |         |       
|Average shares outstanding:            |                           |                       |         |                    |        |      |         |       
|                                       | Basic                     |                       |         | 50,197             |        |      |         | 50,969 |       
|                                       |                           |                       |         |                    |        |      |         |       
|                                       | Diluted                   |                       |         | 50,402             |        |      |         | 51,787 |       
|                                       |                           |                       |         |                    |        |      |         |       

See accompanying notes to consolidated financial statements.

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

|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |       |        |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------- | -------- | ------------------ | ------- | ------ | ------ | ----- | ------ | -
|                                                                         |                                                                                   |                                              |                                                |          | Three months ended
|                                                                         |                                                                                   |                                              |                                                |          | March 31,         
|                                                                         |                                                                                   |                                              |                                                |          |                   
|                                                                         |                                                                                   |                                              |                                                |          | 2003               |         | 2002  
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |       
|                                                                         |                                                                                   |                                              |                                                |          | (Unaudited)       
|Operating activities:                                                    |                                                                                   |                                              |                                                |          |                    |         |        |       
|                                                                         | Net income                                                                        |                                              | $                                              | 14,905   |                    |         | $      | 18,494 |      
|                                                                         | Adjustments to reconcile net income to net
cash provided by operating activities: |                                              |                                                |          |                    |         |        |        |      
|                                                                         |                                                                                   | Provision for bad debt expense               |                                                |          | 644                |         |        |        | 171   |       
|                                                                         |                                                                                   | Depreciation and amortization                |                                                |          | 6,661              |         |        |        | 5,455 |       
|                                                                         |                                                                                   | Deferred income taxes                        |                                                |          | 8,887              |         |        |        | (380  | )     
|                                                                         |                                                                                   | Changes in operating assets and liabilities: |                                                |          |                    |         |        |        |       |       
|                                                                         |                                                                                   |                                              | Service fees receivable                        |          |                    | (11,886 | )      |        |       | (8,430 | )
|                                                                         |                                                                                   |                                              | Service fee prepayments                        |          |                    | (2,447  | )      |        |       | (665   | )
|                                                                         |                                                                                   |                                              | Supplies inventory                             |          |                    | 37      |        |        |       | 1,242  |  
|                                                                         |                                                                                   |                                              | Prepaid expenses and other                     |          |                    | 351     |        |        |       | (44    | )
|                                                                         |                                                                                   |                                              | Amounts payable to affiliated practices        |          |                    |        |        |        |       | (417   | )
|                                                                         |                                                                                   |                                              | Accounts payable and other current liabilities |          |                    | (4,268  | )      |        |       | 6,106  |  
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Net cash provided by operating activities                                |                                                                                   |                                              | 12,884                                         |          |                    |         | 21,532 |       
|Investing activities:                                                    |                                                                                   |                                              |                                                |          |                    |         |        |       
|                                                                         | Purchases of property, equipment and improvements                                 |                                              |                                                | (4,349   | )                  |         |        | (4,747 | )    
|                                                                         | Intangible assets acquired                                                        |                                              |                                                | (286     | )                  |         |        | (2,510 | )    
|                                                                         | Advances to affiliated practices, net                                             |                                              |                                                | (300     | )                  |         |        | (2,740 | )    
|                                                                         | Notes receivable                                                                  |                                              |                                                | (1,172   | )                  |         |        | 158    |      
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Net cash used in investing activities                                    |                                                                                   |                                              | (6,107                                         | )        |                    |         | (9,839 | )     
|Financing activities:                                                    |                                                                                   |                                              |                                                |          |                    |         |        |       
|                                                                         | Repayment of notes payable to affiliated practices                                |                                              |                                                | (2,628   | )                  |         |        | (3,822 | )    
|                                                                         | Repayment of long-term debt                                                       |                                              |                                                | (109,640 | )                  |         |        | (5,000 | )    
|                                                                         | Proceeds from long-term debt                                                      |                                              |                                                | 109,900  |                    |         |        |       |      
|                                                                         | Issuance of common stock                                                          |                                              |                                                | 405      |                    |         |        | 1,297  |      
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Net cash used in financing activities                                    |                                                                                   |                                              | (1,963                                         | )        |                    |         | (7,525 | )     
|Effect of exchange rate changes on cash and cash equivalents             |                                                                                   |                                              | (210                                           | )        |                    |         | (1,840 | )     
|Change in cash and cash equivalents                                      |                                                                                   |                                              | 4,604                                          |          |                    |         | 2,328  |       
|Cash and cash equivalents at beginning of period                         |                                                                                   |                                              | 7,522                                          |          |                    |         | 14,172 |       
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Cash and cash equivalents at end of period                               |                                                                                   | $                                            | 12,126                                         |          |                    | $       | 16,500 |       
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Supplemental cash flow information:                                      |                                                                                   |                                              |                                                |          |                    |         |        |       
|                                                                         | Cash paid during period for:                                                      |                                              |                                                |          |                    |         |        |        |      
|                                                                         |                                                                                   |                                              | Interest                                       |          | $                  | 1,392   |        |        | $     | 1,205  |  
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|                                                                         |                                                                                   |                                              | Income taxes                                   |          | $                  | 77      |        |        | $     | 53     |  
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      
|Supplemental disclosures of non-cash
investing and financing activities: |                                                                                   |                                              |                                                |          |                    |         |        |       
|                                                                         | Notes payable and common stock issued
to obtain Service Agreements                |                                              | $                                              | 284      |                    |         | $      |       |      
|                                                                         |                                                                                   |                                              |                                                |          |                    |         |        |        |      

See accompanying notes to consolidated financial statements.

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Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 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 as of March 31, 2003:

|              |       |             |                                |           |  |       |    |    |  |  |     |     | 
|------------- | ----- | ----------- | ------------------------------ | --------- |  | ----- | -- | -- |  |  | --- | --- | 
|              |       |             | Number of Affiliated Practices
|              |       |             |                               
|Location      |       | Orthodontic |                                | Pediatric |  | Total
|              |       |             |                                |           |  |      
|United States |       |             | 309                            |           |  |       | 29 |    |  |  | 338 |    
|Japan         |       |             | 24                             |           |  |       |   |    |  |  | 24  |    
|Mexico        |       |             | 4                              |           |  |       |   |    |  |  | 4   |    
|Puerto Rico   |       |             | 2                              |           |  |       |   |    |  |  | 2   |    
|Spain         |       |             | 3                              |           |  |       |   |    |  |  | 3   |    
|              |       |             |                                |           |  |       |    |    |  |  |     |    
|              | Total |             |                                | 342       |  |       |    | 29 |  |  |     | 371 | 
|              |       |             |                                |           |  |       |    |    |  |  |     |    

These amounts exclude 42 affiliated orthodontic and pediatric dental practices
that are in litigation with, and have stopped paying service fees to,
OrthAlliance, Inc. (OrthAlliance) as of March 31, 2003. The Company acquired
OrthAlliance in November 2001.

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 the March 31, 2002 financial
statements in order to conform to the presentation of the March 31, 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 three month period ended March 31, 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.

6



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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
expenses.

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 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 depreciates property,
equipment and improvements over their estimated useful lives and records the
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. Service fees receivable do not include any service fees receivable
relating to certain OrthAlliance affiliated practices that are parties to
litigation pending against OrthAlliance and that have ceased remitting service
fees to OrthAlliance.



|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.

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

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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 March 31, 2003 and December
31, 2002 were as follows:

|                              |  |                |         |              |  |   |         | 
|----------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                              |  | March 31,      |         | December 31,
|                              |  | 2003           |         | 2002        
|                              |  |                |         |             
|                              |  | (in thousands)
|Cost of intangible assets     |  | $              | 260,893 |              |  | $ | 262,411 | 
|Less accumulated amortization |  |                | 42,623  |              |  |   | 42,028  | 
|                              |  |                |         |              |  |   |         | 
|Intangible assets, net        |  | $              | 218,270 |              |  | $ | 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 $2.4 million and $2.6 million for the three
months ended March 31, 2003 and 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:

|                                               |  |                |         |              |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                               |  | March 31,      |         | December 31,
|                                               |  | 2003           |         | 2002        
|                                               |  |                |         |             
|                                               |  | (in thousands)
|Leasehold improvements                         |  | $              | 75,725  |              |  | $ | 73,703  | 
|Furniture and fixtures                         |  |                | 66,694  |              |  |   | 64,990  | 
|Other equipment                                |  |                | 209     |              |  |   | 209     | 
|Centers in progress                            |  |                | 256     |              |  |   | 490     | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  |                | 142,884 |              |  |   | 139,392 | 
|Less accumulated depreciation and amortization |  |                | 52,408  |              |  |   | 49,332  | 
|                                               |  |                |         |              |  |   |         | 
|Property, equipment and improvements, net      |  | $              | 90,476  |              |  | $ | 90,060  | 
|                                               |  |                |         |              |  |   |         | 

Depreciation expense on property, equipment and improvements was $3.5 million
and $2.8 million for the three months ended March 31, 2003 and 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 months ended March 31,
2003, the Company recorded impairments of approximately $302,000 related to
intangible assets and approximately $401,000 related to property, equipment and
improvements for offices closed during the three months ended March 31, 2003.
These amounts are included in Amortization and
Depreciation, respectively,
in the accompanying Consolidated Statements of Income.

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Goodwill:

Goodwill represents the excess of purchase price over fair value of net assets
acquired or arising from a business combination. Goodwill relates to the
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. The Company determined that
goodwill was not impaired at March 31, 2003.



|5. |  | TRANSACTIONS WITH AFFILIATED PRACTICES
|-- |  | --------------------------------------

Net advances to Affiliated Practices totaled $30.4 million at March 31, 2003
and $30.5 million at December 31, 2002. The Company had an allowance of $2.6
million and $2.4 million for certain advances to Affiliated Practices that the
Company believes will not be recoverable at March 31, 2003 and December 31,
2002, respectively.

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 $0.5 million and $0.7 million at
March 31, 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 New Credit Facility). The New Credit Facility is comprised of
a $100.0 million revolving line of credit and a $25.0 million term loan.
Approximately $109.9 million was initially borrowed under the New Credit
Facility to retire the Companys prior revolving credit facility and bridge credit
facility and to pay related transaction fees. Of the total amount borrowed, the
Company borrowed the full $25.0 million available under the term loan
component. At March 31, 2003, $109.9 million of indebtedness was outstanding under the New Credit
Facility. The term loan is amortized over three years with fixed, quarterly
principal payments of $2.1 million, plus interest. The New Credit Facility is
secured by a pledge of the capital stock of the Companys operating
subsidiaries. Borrowings under the New Credit Facility generally bear interest at
margins over the Eurodollar rate ranging from 1.50% to 2.50%, and such margin
is based on the Companys leverage ratio as computed under the New Credit
Facility.

The New 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 New
Credit Facility also contains positive 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, incurrence of other indebtedness and other transactions that may
affect the Companys liquidity.



|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

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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.

|                                                                                                                                  |                      |   |                                       |      |      |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------------------------------- | ---- | ---- | - | ------ | ---- | 
|                                                                                                                                  |                      |   | March 31,                            
|                                                                                                                                  |                      |   |                                      
|                                                                                                                                  |                      |   | 2003                                  |      | 2002
|                                                                                                                                  |                      |   |                                       |      |     
|                                                                                                                                  |                      |   | (in thousands, except per share data)
|Income before cumulative effect of change in
accounting principle, as reported                                                    |                      | $ | 14,905                                |      |      | $ | 18,494 |     
|Less stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effect |                      |   | 149                                   |      |      |   | 432    |     
|                                                                                                                                  |                      |   |                                       |      |      |   |        |     
|Pro forma net income                                                                                                              |                      | $ | 14,756                                |      |      | $ | 18,062 |     
|                                                                                                                                  |                      |   |                                       |      |      |   |        |     
|Net income per share:                                                                                                             |                      |   |                                       |      |      |   |        |     
|                                                                                                                                  | Basic, as reported   |   | $                                     | 0.30 |      |   | $      | 0.36 | 
|                                                                                                                                  | Basic, pro forma     |   |                                       | 0.29 |      |   |        | 0.35 | 
|                                                                                                                                  | Diluted, as reported |   |                                       | 0.30 |      |   |        | 0.36 | 
|                                                                                                                                  | Diluted, pro forma   |   |                                       | 0.29 |      |   |        | 0.35 | 



|8. |  | 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 change in
accounting method for income tax purposes previously approved by the Internal
Revenue Service. At March 31, 2003, the Company reduced the deferred tax assets
by the Companys income tax provision for the first quarter of 2003, resulting
in no current tax liability recorded by the Company. The
Company expects the remaining net operating loss carryforwards will offset a
portion of the Companys taxable income for the remainder of 2003. If the net
operating loss carryforwards are not used, they will expire between 2017 and
2022.



|9. |  | NET INCOME PER SHARE
|-- |  | --------------------

The calculation of net income per share is performed using the treasury stock
method. Computations of basic and diluted earnings per share are presented
below:

|             |                                                     |  |                    |        |      |  |   |        | 
|------------ | --------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|             |                                                     |  | Three months ended
|             |                                                     |  | March 31,         
|             |                                                     |  |                   
|             |                                                     |  | 2003               |        | 2002
|             |                                                     |  |                    |        |     
|             |                                                     |  | (in thousands)    
|Numerator:   |                                                     |  |                    |        |      |  |   |       
|             | Net income for basic and diluted earnings per
share |  | $                  | 14,905 |      |  | $ | 18,494 | 
|             |                                                     |  |                    |        |      |  |   |        | 
|Denominator: |                                                     |  |                    |        |      |  |   |       
|             | Denominator for basic earnings per share            |  |                    | 50,197 |      |  |   | 50,969 | 
|             | Effect of dilutive securities                       |  |                    | 205    |      |  |   | 818    | 
|             |                                                     |  |                    |        |      |  |   |        | 
|             | Denominator for diluted earnings per share          |  |                    | 50,402 |      |  |   | 51,787 | 
|             |                                                     |  |                    |        |      |  |   |        | 

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|10. |  | CONTINGENCIES
|--- |  | -------------

Before the Company entered into the merger agreement with OrthAlliance, it
anticipated that some portion of OrthAlliances affiliated practices would
oppose the 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 the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
On April 24, 2003, the U.S. District Court for the Northern District of
Georgia, in ruling on the plaintiffs motion for partial summary judgment in
one of these cases captioned Smith v. OrthAlliance, Inc., held that the
covenants not to compete in the plaintiffs employment agreements with their
practices and service agreements with OrthAlliance are unenforceable because
the covenants contained restrictions that the court determined to be vague and
overbroad. This ruling is limited to these plaintiffs and Georgia law, and
does not apply to the enforceability of covenants not to compete with any other
practices. OrthAlliance intends to challenge this ruling.

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, a similar action was filed in the United
States District Court for the Eastern District of Louisiana against the Company
and the other defendants by James A. Janette. Each of these actions 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.
In each of these complaints, 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 about practices affiliated with OrthAlliance, and by recognizing
revenue 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. The Company
denies these allegations and believes that these actions lack merit. The
Company intends to defend these actions vigorously. These lawsuits are at a
very early stage and, at this time, the Company cannot predict whether it will
prevail or estimate the amount of damages that it 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
these actions. Regardless of the outcome, this action could be costly,
time-consuming and could divert the time and attention of the Companys senior
management.

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. 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 our business.

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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 March 31, 2003, and the results of
operations for the three-month period ended March 31, 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 March 31, 2003, we provided business
services to 371 orthodontic and pediatric dental practices. These amounts
exclude 42 orthodontists and pediatric dentists that are engaged in litigation
(the Excluded OrthAlliance Affiliated Practices) with OrthAlliance, Inc.
(OrthAlliance) and which have ceased paying service fees. We acquired
OrthAlliance in November 2001.

The following table provides information about our affiliated practices.

|                                                  |  |                                |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  |       |     |  
|------------------------------------------------- |  | ------------------------------ | --- | ------------ |  | ---- | --- | ---- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | - |  | ----- | --- | -
|                                                  |  | Number of Affiliated Practices
|                                                  |  |                               
|                                                  |  |                                |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  | Three
|                                                  |  | Year ended December 31,        |     | months ended
|                                                  |  |                                |     | March 31,   
|                                                  |  | 1998                           |     | 1999         |  | 2000 |     | 2001 |  | 2002 |     | 2003
|                                                  |  |                                |     |              |  |      |     |      |  |      |     |     
|Affiliated practices at beginning of period       |  |                                | 164 |              |  |      | 205 |      |  |      | 230 |      |  |  | 245 |   |  |  | 372 |   |  |       | 371 |  
|Affiliated practices added                        |  |                                | 52  |              |  |      | 41  |      |  |      | 33  |      |  |  | 143 |   |  |  | 24  |   |  |       | 9   |  
|Affiliated practices deaffiliated or transitioned |  |                                | (11 | )            |  |      | (16 | )    |  |      | (18 | )    |  |  | (16 | ) |  |  | (25 | ) |  |       | (9  | )
|                                                  |  |                                |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  |       |     |  
|Affiliated practices at end of period             |  |                                | 205 |              |  |      | 230 |      |  |      | 245 |      |  |  | 372 |   |  |  | 371 |   |  |       | 371 |  
|                                                  |  |                                |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  |       |     |  

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 has typically begun 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.

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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | flows method. During the three months ended March 31, 2003, we determined that approximately $302,000 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 currently 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, 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 value assigned by
management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | At March 31, 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 No. 142. The evaluation of the
impairment loss requires management to make estimates and assumptions.
Management determined that goodwill was not impaired at March 31, 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. 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.                                       

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| |  |  | 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 March 31, 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 $18.2 million.

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 three months ended March 31, 2003, service fees receivable, net of
an allowance for uncollectible amounts, increased $11.7 million, or 11.0%, to
$118.2 million at March 31, 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 expenses. 

As discussed in the section 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.

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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 we are to be reimbursed over a five-year period. During
the three months ended March 31, 2003, the current portion of service fees
receivable increased $10.2 million, or 16.0%, to $73.6 million, net of an
allowance for uncollectible amounts of $5.3 million, at March 31, 2003 from
$63.4 million, net of an allowance for uncollectible amounts of $5.1 million,
at December 31, 2002. During the three months ended March 31, 2003, the
unreimbursed expense portion of service fees receivable increased $1.5 million,
or 3.5%, to $44.6 million at March 31, 2003, from $43.1 million at December 31,
2002.

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

|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |     |      |      |      | 
|-------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------- | ----------------------------------------------- | ---------------------------------- | ---- | ------------- | ----- | ------------ | ---- | -------- | ----- | --- | ---- | ---- | ---- | 
|                                                         |                                                         |                                          |                                                 |                                    |      | March 31,     |       | December 31, |      |          |       |    
|                                                         |                                                         |                                          |                                                 |                                    |      | 2003          |       | 2002         |      | Increase
|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |         
|                                                         |                                                         |                                          |                                                 |                                    |      | (in millions)
|Current portion of service fees receivable:              |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |    
|                                                         | Fee revenue related to billed patient fees receivable   |                                          | $                                               | 41.7                               |      |               | $     | 38.2         |      |          | $     | 3.5 |     
|                                                         | Fee revenue related to unbilled patient fees receivable |                                          |                                                 | 37.2                               |      |               |       | 30.3         |      |          |       | 6.9 |     
|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |     |      |     
|                                                         |                                                         | Subtotal                                 |                                                 |                                    | 78.9 |               |       |              | 68.5 |          |       |     | 10.4 |     
|                                                         |                                                         | Less allowance for uncollectible amounts |                                                 |                                    | (5.3 | )             |       |              | (5.1 | )        |       |     | (0.2 | )   
|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |     |      |     
|                                                         |                                                         |                                          | Current
portion of service fees receivable, net |                                    |      | 73.6          |       |              |      | 63.4     |       |     |      | 10.2 |     
|Unreimbursed expense
portion of service fees receivable: |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |    
|                                                         | Fee revenue related to certain unreimbursed expenses    |                                          |                                                 | 44.6                               |      |               |       | 43.1         |      |          |       | 1.5 |     
|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |     |      |     
|                                                         |                                                         |                                          |                                                 | Total service fees receivable, net |      | $             | 118.2 |              |      | $        | 106.5 |     |      | $    | 11.7 | 
|                                                         |                                                         |                                          |                                                 |                                    |      |               |       |              |      |          |       |     |      |     

Current Portion of Service Fees Receivable

Fee revenue related to billed patient fees receivable. At March 31, 2003,
approximately $41.7 million of our service fees receivable resulted from fee
revenue related to billed patient fees receivable, representing an increase of
$3.5 million, or 9.2%, 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 first quarter of 2003. The increase was also due to a general
increase in the average age of patient contracts of OrthAlliance affiliated practices that have
generated service fee prepayments, which resulted in a decrease in service fee prepayments and
an increase in service fees receivable for these practices.

Fee revenue related to unbilled patient fees receivable. During the three
months ended March 31, 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 March 31, 2003,
approximately $37.2 million of our service fees receivable resulted from fee
revenue related to unbilled patient fees receivable, representing an increase
of $6.9 million, or 22.8%, 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. The increase was also
due to a general increase in the average age of patient contracts of OrthAlliance
affiliated practices that have generated service fee prepayments, which resulted
in a decrease in service fee prepayments and an increase in service fees receivable
for these practices.

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.

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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.

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.

(SINGLE PATIENT CONTRACT PERFORMANCE GRAPH)

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 three months
ended March 31, 2003 as the average age of our affiliated practices patient
contracts increased slightly by approximately 0.3 months.

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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 March 31, 2003,
approximately $44.6 million of our service fees receivable resulted from fee
revenue related to certain unreimbursed practice-related expenses, representing
an increase of $1.5 million or 3.5% 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).

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
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 depreciate property, equipment and improvements
over their estimated useful lives and record the 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, professional fees, maintenance and utility costs,
office supply expense, telephone expense, taxes, license fees, printing expense
and shipping expense.

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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.

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

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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 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. Consequently, our affiliated practices
have 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.

|                              |                           |                       |       |              |      |            |       |            |      |  |       |       |      |  
|----------------------------- | ------------------------- | --------------------- | ----- | ------------ | ---- | ---------- | ----- | ---------- | ---- |  | ----- | ----- | ---- | -
|                              |                           |                       |       | Three months |      |            |       |           
|                              |                           |                       |       | ended        |      |            |       |           
|                              |                           |                       |       | March 31,    |      | Percentage
|                              |                           |                       |       |              |      | Increase/ 
|                              |                           |                       |       | 2003         |      | 2002       |       | (Decrease)
|                              |                           |                       |       |              |      |            |       |           
|Fee revenue                   |                           |                       | 100.0 | %            |      |            | 100.0 | %          |      |  | (9.6  | )%   
|Direct expenses:              |                           |                       |       |              |      |            |       |            |      |  |       |      
|                              | Employee costs            |                       |       | 29.1         |      |            |       | 28.6       |      |  |       | (7.9  | )   
|                              | Orthodontic supplies      |                       |       | 10.5         |      |            |       | 8.6        |      |  |       | 10.6  |     
|                              | Rent                      |                       |       | 9.4          |      |            |       | 9.1        |      |  |       | (5.7  | )   
|                              | Marketing and advertising |                       |       | 6.2          |      |            |       | 8.0        |      |  |       | (30.3 | )   
|                              |                           |                       |       |              |      |            |       |            |      |  |       |      
|                              |                           | Total direct expenses |       |              | 55.2 |            |       |            | 54.3 |  |       |       | (7.9 | )
|General and administrative    |                           |                       | 12.9  |              |      |            | 12.9  |            |      |  | (10.1 | )    
|Depreciation and amortization |                           |                       | 6.6   |              |      |            | 4.9   |            |      |  | 22.1  |      
|                              |                           |                       |       |              |      |            |       |            |      |  |       |      
|Operating profit              |                           |                       | 25.3  |              |      |            | 27.9  |            |      |  | (18.2 | )    
|Interest (income) expense     |                           |                       | 1.4   |              |      |            | 1.2   |            |      |  | 6.0   |      
|Income before income taxes    |                           |                       | 23.9  |              |      |            | 26.7  |            |      |  | (19.4 | )    
|Income taxes                  |                           |                       | 9.0   |              |      |            | 10.1  |            |      |  | (19.4 | )    
|                              |                           |                       |       |              |      |            |       |            |      |  |       |      
|Net income                    |                           |                       | 14.9  | %            |      |            | 16.6  | %          |      |  | (19.4 | )%   
|                              |                           |                       |       |              |      |            |       |            |      |  |       |      

Overview.Our net income decreased $3.6 million to $14.9 million for the
three months ended March 31, 2003, from $18.5 million for the same period in
2002, primarily due to a decrease in fee revenue. Our fee revenue decreased
$10.7 million in the three months ended March 31, 2003 compared to the same
period of 2002, which was partially offset by a decrease of $4.8 million in
direct expenses and a decrease of $1.5 million in general and administrative
expense for the three months ended March 31, 2003 compared to the same period
in 2002. For the three months ended March 31, 2003, our operating margin (or
operating profits as a percentage of fee revenue) decreased to 25.3% from 27.9%
for the three months ended March 31, 2002.

Our results for the three months ended March 31, 2003 compared to the same
period in 2002 were affected by certain affiliated practices that were included
in our results for the three months ended March 31, 2002 and that have either
discontinued paying service fees required under their service, management service or consulting agreements or have bought out of their agreements. We stopped
accruing fee revenue and paying practice-related expenses for these practices
as they stopped paying their service fees. At March 31, 2003, we were affiliated with 371
practices, of which 29 practices were not paying service fees as of that date. At March
31, 2002, we were affiliated with 376 practices, of which one practice was not paying service
fees as of that date.

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The following are key operating statistics of our affiliated practices during
the three months ended March 31, 2003 and 2002:

|                                                 |  |                                        |         |           |  |            |         |   |  |  |      |   
|------------------------------------------------ |  | -------------------------------------- | ------- | --------- |  | ---------- | ------- | - |  |  | ---- | --
|                                                 |  | Three months endedMarch 31,            |         |           |  |           
|                                                 |  |                                        |         | Increase/
|                                                 |  | 2003                                   |         | 2002      |  | (Decrease)
|                                                 |  |                                        |         |           |  |           
|                                                 |  | (in thousands, except percentage data)
|Number of new patients                           |  |                                        | 55      |           |  |            | 59      |   |  |  | (6.8 | )%
|Total new patient balances                       |  | $                                      | 177,877 |           |  | $          | 187,968 |   |  |  | (5.4 | )%
|Total
number of active patients at end of period |  |                                        | 538     |           |  |            | 499     |   |  |  | 7.8  | % 
|Comparable center fee revenue growth (1)         |  |                                        | 11.4    | %         |  |            | 19.1    | % |  |  | N/A  |   



---

|(1) |  | 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 paying service fees throughout each of the two periods being
compared. Accordingly, because we acquired OrthAlliance in November 2001, OrthAlliance affiliated practices are included in
the computation of comparable center fee revenue growth for the first quarter of 2003 but
not for the first quarter of 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fee Revenue.Fee revenue decreased $10.7 million, or 9.6%, to $100.6
million for the three months ended March 31, 2003 from $111.3 million for the
same period in 2002. This net decrease was attributable to the following:



| |  |  | an increase of $10.7 million in fee revenue for centers affiliated and paying service fees
throughout both periods, including OrthAlliance affiliated centers;
and          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a decrease of $21.4 million in fee revenue from all other
centers, including centers for practices that are no longer affiliated with us or that ceased paying service fees.

Fee revenue during the three months ended March 31, 2003 was negatively
impacted by certain affiliated practices that stopped paying service fees or
that bought out of their service, management service or consulting agreements after March 31, 2002. We stopped accruing fee revenue from these
practices, which reduced our fee revenue for the three months ended March 31,
2003 as compared to the same period of 2002. We expect some continued
fluctuations in fee revenue during 2003 as some OrthAlliance affiliated
practices may buy-out of their service, consulting or management service
agreements or stop paying service fees. However, OrthAlliance affiliated
practices that are not currently paying services fees may begin utilizing our
services and paying service fees in the future. We expect that declines in fee
revenue from these buy-outs would be offset by increases in fee revenue from
other practices over time.

Employee Costs.Employee costs consist of payroll and benefits costs for
employees at our affiliated centers and corporate headquarters. We do not
employ affiliated orthodontists, pediatric dentists or general dental
assistants. Employee costs decreased $2.5 million, or 7.9%, to $29.3 million
for the three months ended March 31, 2003 from $31.8 million for the same
period in 2002. This decrease was due to the exclusion of employee
costs for certain affiliated practices that bought out of their
service, management service or consulting agreements or ceased paying service fees required under their
agreements after March 31, 2002. As a percentage of fee revenue, employee costs increased to 29.1%
for the three months ended March 31, 2003 from 28.6% for the same period in
2002.

Orthodontic Supplies.Orthodontic supplies primarily represent 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 increased $1.0 million, or
10.6%, to $10.6 million for the three months ended March 31, 2003 from $9.6
million for the three months ended March 31, 2002. As a percentage of fee
revenue, orthodontic supplies expense increased to 10.5% for the three months
ended March 31, 2003 from 8.6% for the three months ended March 31, 2002.
Orthodontic supplies 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.

23



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Rent.Rent expense primarily consists of costs of leasing office space
for our affiliated centers and corporate headquarters, including common area
maintenance charges. Rent expense decreased $0.6 million, or 5.7%, to $9.5
million for the three months ended March 31, 2003 from $10.1 million for the
same period in 2002. This decrease was primarily due to the exclusion of rent expense for certain affiliated practices that bought
out of their service, management service or consulting agreements or ceased paying service fees required under their agreements after March 31, 2002. As
a percentage of fee revenue, rent expense increased to 9.4% for the three
months ended March 31, 2003 from 9.1% for the same period in 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 $2.7 million,
or 30.3%, to $6.2 million for the three months ended March 31, 2003 from $9.0
million for the three months ended March 31, 2002. As a percentage of fee
revenue, marketing and advertising expense decreased to 6.2% for the three
months ended March 31, 2003 from 8.0% for the same period in 2002. The
decrease was primarily due to:



| |  |  | payments made during the three months ended March 31, 2002
for an advertising arrangement related to OrthAlliance affiliated
practices that was not renewed for the three months ended March 31,
2003;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | credits received on advertising spots during the three months
ended March 31, 2003 preempted by war coverage;                                                                                         
|
| |  |  | timing of advertising production and broadcast schedules; and                                                                                                                                         
|
| |  |  | lower rates on annual media buying as a result of the slower economy during the first quarter of 2003.                                                                                                

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 decreased $1.5 million, or 10.1%, to $12.9 million for
the three months ended March 31, 2003 from $14.4 million for the same period in
2002. This decrease was primarily due to a decrease of $0.9 million in
telephone and utility costs and a decrease of $0.9 million in office supplies
expense. As a percentage of fee revenue, general and administrative expense
was 12.9% for the three months ended March 31, 2003 and 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 increased
$700,000, or 25.0%, to $3.5 million for the three months ended March 31, 2003
from $2.8 million for the same period in 2002. As a percentage of fee revenue,
depreciation expense increased to 3.9% for the three months ended March 31,
2003 from 2.5% for the same period of 2002. The increase in depreciation
expense was a result of the fixed assets acquired for centers developed or
acquired since March 31, 2002. During the three months ended March 31, 2003,
we recorded impairments of approximately $401,000 related to property,
equipment and improvements in offices closed during 2003, which was included in
depreciation expense. Amortization expense on intangible assets was $2.4
million and $2.6 million for the three months ended March 31, 2003 and 2002,
respectively. As a percentage of fee revenue, amortization expense was 2.7% for
the three months ended March 31, 2003, compared to 2.4% for the same period in
2002. During the three months ended March 31, 2003, we recorded impairments of
approximately $302,000 related to intangible assets, which was included in
amortization expense.

24



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Operating Profit.Operating profit decreased $5.6 million, or 18.2%, to
$25.4 million for the three months ended March 31, 2003 from $31.0 million for
the same period in 2002. As a percentage of fee revenue, operating profit
decreased to 25.3% for the three months ended March 31, 2003 from 27.9% for the
same period of 2002, as a result of the factors discussed above.

Interest.Net interest expense consists of interest charges under our
credit facilities and notes payable to affiliated practices. Net interest
expense was $1.4 million and $1.3 million for the three months ended March 31,
2003 and 2002, respectively. As a percentage of fee revenue, net interest
expense increased to 1.4% for the three months ended March 31, 2003 from 1.2%
for the same period in 2002.

Income Taxes.Income taxes decreased $2.2 million, or 19.4%, to $9.0
million for the three months ended March 31, 2003 from $11.2 million for the
same period in 2002. Our effective income tax rate was 37.8% for the three
months ended March 31, 2003 and 2002.

Net Income.For the three months ended March 31, 2003, our net income
decreased $3.6 million, or 19.4%, to $14.9 million, from $18.5 million for the
same period in 2002, primarily due to a decrease in fee revenue during the
three months ended March 31, 2003 compared to the three months ended March 31,
2002. As a percentage of fee revenue, net income for the three months ended
March 31, 2003 decreased to 14.9% from 16.6% for the three months ended March
31, 2002, as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital (total current assets less total current liabilities) at
March 31, 2003 was $100.8 million, including cash and cash equivalents of $12.1
million, compared to working capital at December 31, 2002 of $89.5 million,
including cash and cash equivalents of $7.5 million. At March 31, 2003, our
current ratio (total current assets divided by total current liabilities) was
3.11, compared to a current ratio of 2.66 at December 31, 2002. The increase
of $11.3 million in working capital at March 31, 2003 compared to December 31,
2002 was primarily due to increases of $10.2 million in the current portion of
service fees receivable.

Cash Flows

The following table summarizes cash flow information for the three months ended
March 31, 2003 and 2002:

|                                          |  |                    |        |      |  |   |        |  
|----------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                          |  | Three months ended
|                                          |  | March 31,         
|                                          |  |                   
|                                          |  | 2003               |        | 2002
|                                          |  |                    |        |     
|Net cash provided by operating activities |  | $                  | 12,884 |      |  | $ | 21,532 |  
|Net cash used in investing activities     |  |                    | (6,107 | )    |  |   | (9,839 | )
|Net cash used in financing activities     |  |                    | (1,963 | )    |  |   | (7,525 | )
|Change in cash and cash equivalents       |  |                    | 4,604  |      |  |   | 2,328  |  

Operating Activities. Net cash provided by operating activities was $12.9
million for the three months ended March 31, 2003, a decrease of $8.6 million,
or 40.2%, from $21.5 million for the same period in 2002. Net cash provided by
operating activities for the three months ended March 31, 2003 was primarily
affected by the following:

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| |  |  | Net income and non-cash items. Net income decreased $3.6
million, or 19.4%, for the three months ended March 31, 2003 to
$14.9 million from $18.5 million for the same period in 2002.
Non-cash items increased $1.7 million, or 29.9%, to $7.3 million for
the three months ended March 31, 2003 from $5.6 million for the same
period in 2002, due to an increase in
depreciation and amortization expense of $1.2 million and an increase
in the provision for bad debt expense of $0.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Deferred income taxes. We used deferred tax assets related
primarily to net operating loss carryforwards to offset our tax provision for
the first quarter of 2003 of approximately $9.0 million, which
resulted in no tax liability as of March 31, 2003. We expect the
remaining net operating loss carryforwards will offset a portion of
our taxable income for the remainder of 2003. These net operating
loss carryforwards are primarily related to the cumulative effect of
a change in accounting method for income tax purposes previously
approved by the Internal Revenue Service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Service fees receivable.During the three months ended March
31, 2003, the current portion of service fees receivable, net of
allowance for uncollectible amounts, increased $10.2 million, or
16.0%, to $73.6 million at March 31, 2003 from $63.4 million at
December 31, 2002. The unreimbursed expense portion of service fees
receivable increased $1.5 million, or 3.5%, during the three months
ended March 31, 2003, to $44.6 million at March 31, 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 financial statements. Because of the
long term nature of these receivables, cash flow from operating
activities is negatively affected by the increase in service fees
receivable. 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. This increase and these three categories
of fee revenue are addressed in greater detail in the section above
captioned Service Fees Receivable.
|
| |  |  | Service fee prepayments. During the three months ended March
31, 2003, service fee prepayments decreased $2.4 million, or 31.6%,
to $5.3 million at March 31, 2003 from $7.7 million at December 31,
2002. This decrease was primarily due to a general increase during the three months
ended March 31, 2003 in the average age of patient contracts of
OrthAlliance affiliated practices that have generated service fee prepayments,
which resulted in a decrease in service fee prepayments and an increase in
service fees receivable for these practices. 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. 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 treatment fees,
this results in us receiving cash in advance of incurring certain
practice-related expenses and recognizing certain service fees as
fee revenue.                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Accounts payable and other current liabilities. During the
three months ended March 31, 2003, cash used for accounts payable
and other current liabilities was $4.3 million, compared to cash
provided by accounts payable and other current liabilities of $6.1
million during the three months ended March 31, 2002. The increase
in cash use from accounts payable and other current liabilities
during the three months ended March 31, 2003 was mostly offset by
the benefit from the deferred tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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Investing Activities. Net cash used in investing activities was $6.1
million for the three months ended March 31, 2003, a decrease of 37.9% from
$9.8 million for the same period in 2002. This decrease was primarily due to a
decrease of $2.2 million used to acquire service or consulting agreements and a
decrease of $2.4 million in advances to affiliated practices during the three
months ended March 31, 2003 compared to the same period in 2002. Partially
offsetting these decreases was an increase of $1.3 million in notes receivable
from affiliated practices.



| |  |  | Intangible assets acquired. During the three months ended
March 31, 2003, we paid approximately $300,000 to acquire and amend
service, management service or consulting 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 service agreement, compared to $2.5 million
for the same period in 2002. The decrease in cash use for
intangible assets during 2003 results from our shift in focus from
new affiliations to assisting existing affiliated practices to grow
and developing de novopractices, which generally requires less
capital investment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Purchases of property, equipment and improvements. We
purchased $4.3 million and $4.7 million in property, equipment and
improvements for the three months ended March 31, 2003 and 2002,
respectively. The following table provides information about the
composition of these purchases during the three months ended March
31, 2003 (in millions):                                                                                                                                                                                                                                                                                                                             

|                                                                    |  |   |     | 
|------------------------------------------------------------------- |  | - | --- | 
|Center additions                                                    |  | $ | 1.9 | 
|Remodeling and additional capital expenditures for existing centers |  |   | 1.6 | 
|Capital expenditures for corporate offices                          |  |   | 0.2 | 
|International development                                           |  |   | 0.6 | 
|                                                                    |  |   |     | 
|Total                                                               |  | $ | 4.3 | 
|                                                                    |  |   |     | 



| |  |  | Advances to affiliated practices. We provided net advances
of approximately $300,000 to affiliated practices during the three months
ended March 31, 2003, compared to $2.7 million for the same period
in 2002.The decrease in net advances during the three months ended
March 31, 2003 compared to the same period in 2002 is primarily due
to our increased focus in obtaining repayments on advances from our
affiliated practices.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Notes receivable.We increased loans to affiliated practices
by $1.3 million during the three months ended March 31, 2003
compared to the same period in 2002. These loans primarily consist
of promissory notes from practices that have completed buy-outs of
their service, management service and consulting agreements.                                                                                                             

Financing Activities. Net cash used in financing activities was $2.0
million for the three months ended March 31, 2003, compared to $7.5 million for
the same period in 2002. The decrease in cash use was due to a decrease of
repayments under our line of credit and notes payable to affiliated
practices during the three months ended March 31, 2003. During the three months
ended March 31, 2003, we obtained a new credit facility under which we
borrowed $109.9 million and used this borrowing to retire our prior credit
facility and bridge credit facility and to pay related transactions costs. We repaid $5.0 million
on our prior line of credit during the three months ended March 31, 2002 and
did not repay any indebtedness under our new credit facility during the three months ended March 31, 2003. Also
during the three months ended March 31, 2003, we repaid $2.6 million to our
affiliated practices, compared to $3.8 million during the three months ended
March 31, 2002.

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Uses of Capital.

Capital Expenditures. Our capital expenditures consist primarily 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 $350,000, 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 our primary lender. The outstanding
balance of these amounts we guaranteed was approximately $500,000 at
March 31, 2003 and approximately $700,000 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.

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.

At March 31, 2003, we had current maturities of $10.4 million under our
credit facility and $7.0 million due to our affiliated practices. We expect
cash from operations to fund these payments during 2003. We also expect to use
cash generated from operations to fund amounts earned under incentive programs.
If all conditions are met under these incentive programs during 2003, we
anticipate paying an aggregate of $6.3 million in 2003.

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 of the number of affiliated centers, and
bears interest at varying rates above the lenders prime rate or Eurodollar
rate. Amounts borrowed under the credit facility are secured by a security
interest in our ownership interests in 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.

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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.






|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------

During the three months ended March 31, 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-14 and 15d-14 under the Securities Exchange
Act of 1934) as of a date within 90 days prior to the filing of this Report.
Based upon, and as of the date of, that evaluation, 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 Controls

There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation by our Chief Executive Officer and Chief Financial Officer.




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. On April
24, 2003, the U.S. District Court for the Northern District of Georgia, in
ruling on the plaintiffs motion for partial summary judgment in one of these
cases captioned Smith v. OrthAlliance, Inc., held that the covenants not to
compete in the plaintiffs employment agreements with their practices and
service agreements with OrthAlliance are unenforceable because the covenants
contained restrictions that the court determined was vague and overbroad. This
ruling is limited to these plaintiffs and Georgia law, and does not apply to

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the enforceability of covenants not to compete with any other practices.
OrthAlliance intends to challenge this ruling.

On April 10, 2003, Ilena and Guiseppe Chiaretti filed an action in the United
States District Court for the Eastern District of Louisiana against us 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, a
similar action was filed in the United States District Court for the Eastern
District of Louisiana against us and the other defendants by James A. Janette.
Each of these actions 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. In each of these complaints, the plaintiffs allege that
we 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 about practices affiliated with OrthAlliance, and by
recognizing revenue 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. We deny
these allegations and believe that these actions lack merit. We intend to
defend these actions vigorously. These lawsuits are at a very 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 these actions. Regardless of the
outcome, this action could be costly, time-consuming and could divert the time
and attention of our senior management.

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.

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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)                                                                                                                                                                                                              
|               | 10.1 |             |  | Credit Agreement, dated as of January 2, 2003, among
Orthodontic Centers of America, Inc., as Borrower, certain of its
domestic subsidiaries, as Guarantors, the Lenders named therein, and
Bank of America, N.A., as Administrative Agent, L/C Issuer and
Alternative Rate Lender, Bank One, NA, as Syndication Agent, and
U.S. Bank, National Association, as Documentation Agent*



---

|* |  | Incorporated by reference to exhibits filed with the Registrants Annual
Report on Form 10-K for the year ended December 31, 2002 (File No.
001-13457).
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | REPORTS ON FORM 8-K                                                                           
|--- |  | ----------------------------------------------------------------------------------------------
|   
|    |  | During the three months ended March 31, 2003, we did not file any
current reports on Form 8-K.

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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: May 15, 2003 |  | /s/ Bartholomew F. Palmisano, Sr.Bartholomew F. Palmisano, Sr.
Chairman of the Board, President
and Chief Executive Officer
|                  
|                   |  |                                                                                                                            
|                  
|                   |  | /s/ Thomas J. SandemanThomas J. Sandeman
Chief Financial Officer                                                           

32



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##### Table of Contents






CERTIFICATION

I, Bartholew F. Palmisano, Sr., certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Orthodontic Centers of
America, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):



| | a) |  | All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|             |  |                                                                                                                            
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------
|May 15, 2003 |  | /s/ Bartholomew F. Palmisano, Sr.Bartholomew F. Palmisano, Sr.
Chairman of the Board, President and
Chief Executive Officer

33



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##### Table of Contents



CERTIFICATION

I, Thomas J. Sandeman, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Orthodontic Centers of
America, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):



| | a) |  | All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|             |  |                                                                 
|------------ |  | ----------------------------------------------------------------
|May 15, 2003 |  | /s/ Thomas J. SandemanThomas J. Sandeman
Chief Financial Officer

34



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##### Table of Contents






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)                                                                                                                                                                                                              
|10.1           |  | Credit Agreement, dated as of January 2, 2003,
among Orthodontic Centers of America, Inc., as Borrower, certain of its domestic subsidiaries, as Guarantors,
the Lenders named therein, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Alternative Rate
Lender, Bank One, NA, as Syndication Agent, and U.S. Bank, National Association, as Documentation Agent*



---



|* |  | Incorporated by reference to exhibits filed with the Registrants Annual
Report on Form 10-K for the year ended December 31, 2002 (File No.
001-13457).
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------