<PAGE>
                                                                    Exhibit 13.1

ITEM 6. SELECTED FINANCIAL DATA

        The selected consolidated statement of income data for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997, and the selected consolidated
balance sheet data at December 31, 2001, 2000, 1999, 1998 and 1997, have been
derived from the Consolidated Financial Statements of Monarch Dental Corporation
(the "Company") that have been audited by Arthur Andersen LLP, independent
public accountants. The following selected consolidated financial information
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company.

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,

(IN THOUSANDS, EXCEPT PER SHARE DATA)                      2001         2000         1999        1998         1997
------------------------------------------------------  ----------   ----------   ---------   ----------   ----------
<S>                                                     <C>          <C>          <C>         <C>          <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
    Patient revenue, net                                $ 211,867    $ 211,339    $ 204,070   $ 129,601    $  68,619
    Operating expenses:
         Provider salaries and benefits                    72,933       70,484       67,089      40,283       21,179
         Clinical and other salaries and benefits          57,083       56,657       53,195      36,556       18,803
         Dental supplies                                   10,744       10,534       10,386       6,898        4,282
         Laboratory fees                                   11,312       11,068        9,888       5,954        2,902
         Occupancy                                         10,507       10,265       10,066       7,265        3,709
         Advertising                                        2,037        2,684        3,073       2,436        1,781
         Other operating expenses                          27,623       24,693       22,031      17,855        7,944
         Strategic alternative costs                          317        2,347           --          --           --
         Depreciation and amortization                     11,516       11,110       10,549       9,863        2,938
                                                        ---------    ---------    ---------   ---------    ---------
                                                          204,072      199,842      186,277     127,110       63,538
                                                        ---------    ---------    ---------   ---------    ---------
    Operating income                                        7,795       11,497       17,793       2,491        5,081
    Interest expense, net                                  10,187       10,527        7,687       2,872        1,545
    Minority interest in consolidated subsidiaries            127          278          225          12           46
    Loss on sale of subsidiary                              1,067           --           --          --           --
                                                        ---------    ---------    ---------   ---------    ---------
    Income (loss) before income taxes and
         extraordinary item                                (3,586)         692        9,881        (393)       3,490
    Income taxes                                              200        1,174        3,300          31        1,355
                                                        ---------    ---------    ---------   ---------    ---------
    Income (loss) before extraordinary item                (3,786)        (482)       6,581        (424)       2,135
    Extraordinary loss on early extinguishment of
         debt, net of applicable tax benefit of
         $167                                                  --           --           --          --         (264)
                                                        ---------    ---------    ---------   ---------    ---------
    Net income (loss)                                   $  (3,786)   $    (482)   $   6,581   $    (424)   $   1,871
                                                        =========    =========    =========   =========    =========
    Net income (loss) per common share(1):
         Income (loss) before extraordinary item        $   (1.75)   $   (0.22)   $    3.16   $   (0.24)   $    2.01
         Extraordinary item                                    --           --           --          --        (0.25)
                                                        ---------    ---------    ---------   ---------    ---------

         Net income (loss)                              $  (1.75)    $   (0.22)   $    3.16   $   (0.24)   $    1.76
                                                        =========    =========    =========   =========    =========
    Net income (loss) per common share - assuming
         dilution(1):
         Income (loss) before extraordinary item        $  (1.75)    $   (0.22)   $    3.16   $   (0.24)   $    1.53
         Extraordinary item                                    --           --           --          --        (0.19)
                                                        ---------    ---------    ---------   ---------    ---------

         Net income (loss)                              $  (1.75)    $   (0.22)   $    3.16   $   (0.24)   $    1.34
                                                        =========    =========    =========   =========    =========

    Weighted average common shares outstanding -
         basic                                              2,164        2,146        2,084       1,801        1,061
    Weighted average common and common
         equivalent shares outstanding - diluted            2,164        2,146        2,086       1,801        1,391

--------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)     Computed on the basis described in Note 2 of Notes to Consolidated
        Financial Statements.


<TABLE>
<CAPTION>
                                                                        DECEMBER 31,

            (IN THOUSANDS)                             2001       2000      1999       1998       1997
            ---------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>      <C>        <C>        <C>
            CONSOLIDATED BALANCE SHEET DATA:
                Cash and cash equivalents             $ 3,811    $ 3,000  $  4,843   $  3,993   $  2,975

                Working capital (deficit)             (58,518)     2,614    (7,525)   (13,902)     1,337

                Total assets                          148,930    171,696   179,866    167,418     64,592
                Long-term debt, less current
                 maturities                               180     76,967    77,183     71,328     11,200

                Total stockholders' equity             63,761     67,508    66,594     57,463     41,966
</TABLE>



                                       1
<PAGE>
        ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

        This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934, including statements under
"Liquidity and Capital Resources" regarding the ability to renegotiate its loan
agreement on acceptable terms or maintain sufficient liquidity to fund future
operations,the risk that the Company will not receive a waiver of its current
defaults under its Credit Facility and the related risks that the Company's
lenders will accelerate the maturity of its indebtedness or apply the Company's
cash balances to debt repayment and under "Critical Accounting Policies"
regarding the Company's expectation that it will record a significant impairment
charge related to certain of its markets following the completion of its initial
impairment review in the second quarter of 2002. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among others, risks
associated with the Company's high levels of short-term indebtedness, reliance
on certain personnel, acquisition strategy and expansion within existing
markets, possible volatility of stock price, competition and other risks
detailed in the Company's Securities and Exchange Commission filings. These and
other risk factors are listed below under the caption "Certain Factors That May
Affect Future Results."

OVERVIEW

        The Company provides management and administrative services to dental
group practices in selected markets located in Texas, Colorado, Utah, Arizona,
New Mexico, Arkansas, Indiana, Ohio, New Jersey, Pennsylvania, Virginia, Georgia
and Florida. The dental group practices are comprised of dental facilities
(each, a "Dental Office" and collectively, the "Dental Offices") that provide
general dentistry services such as examinations, cleanings, fillings, bonding,
placing crowns and fitting and placing fixed or removable prostheses. Many of
the Dental Offices also provide specialty dental services such as orthodontics,
oral surgery, endodontics, periodontics and pediatric dentistry. The Dental
Offices focus on fee-for-service dentistry, supplementing this business with
revenue from contracts with capitated managed dental care plans.

        The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets. The Company seeks to
generate growth within its existing markets by assisting the Dental Offices in
increasing patient volume and fees in existing Dental Offices, either on a
per-patient or per-procedure basis, by increasing the physical space of existing
Dental Offices and by opening Dental Offices on a de novo basis. Historically,
the Company has entered selected markets by acquiring dental group practices.
The Company has used the acquired dental group practice as a "pedestal" from
which to expand within the newly entered market.

        Since 1998, the Company's acquisition activity has decreased
significantly due to financing constraints and the Company's focus on improving
operations at its existing Dental Offices. Under the terms of the Company's
Credit Facility, the Company is prohibited from making acquisitions without bank
approval. The Company's current growth strategy is to strengthen the Company's
presence in its existing markets by acquiring dental practices in existing
markets and opening Dental Offices on a de novo basis when opportunities arise
and financial constraints permit. In December 2001, the Company sold its
Wisconsin operations consisting of 26 Dental Offices and used proceeds from the
sale to repay indebtedness of approximately $9.3 million under its existing
Credit Facility. The Company currently provides management and administrative
services to 158 Dental Offices in 17 markets. The number of Dental Offices the
Company provides management and administrative services to, including the
opening of de novo Dental Offices, acquisitions and Dental Offices that were
closed or sold during the last five years is shown in the table below:

<TABLE>
<CAPTION>
                                                       2001         2000         1999       1998 (1)       1997
                                                       ----         ----         ----       --------       ----
<S>                                                   <C>          <C>          <C>           <C>          <C>
Offices at beginning of period                         189          190          192           99           53
De novo offices                                         -            1            -             7            7
Acquired offices                                        -            1            7            88           39
Closed offices                                         (4)          (3)          (7)           (2)           -
Sold offices                                          (27)           -           (2)            -            -
                                                       ---          ---          ---           ---          --
Offices at end of period                               158          189          190           192          99
                                                       ===          ===          ===           ===          ==
</TABLE>

(1)     Includes two less acquired offices due to two office closings prior to
        the Valley Forge Dental Associates, Inc. acquisition.


                                       2
<PAGE>

        The Company's 2001 results of operations were materially affected by two
items recorded in the fourth quarter, which in the aggregate decreased net
income $1.7 million, or $0.80 per share. The two items included a $1.1 million
loss on sale of subsidiary resulting from the sale of the Company's Wisconsin
operations in December 2001 and a pre-tax charge of $1.0 million for
uncollectible unbilled orthodontic receivables. This charge originated due to
programming enhancements made to the Company's clinical management system during
the fourth quarter of 2001 that have enabled the Company to more accurately
track its orthodontic contracts. The Company recognized the $1.0 million charge
in the fourth quarter of 2001 as a change in the accounting estimate when the
information became known. Additionally, the Company recorded strategic
alternative costs of $317,000 on a pre-tax basis, or $0.10 per share, during the
first half of 2001 resulting primarily from legal, investment banking and other
professional fees incurred from efforts to explore strategic alternatives in
order to maximize shareholder value.

        The Company's 2000 results of operations were materially affected by
strategic alternative costs discussed above of $2.3 million on a pre-tax basis,
or $0.72 per share. In addition, the Company also recorded a non-recurring
pre-tax expense of $1.0 million, or $0.31 per share, in the fourth quarter of
2000 consisting of severance payments made to a former executive of the Company.

        The Company's 1999 results of operations were materially affected by two
items recorded in the second quarter and two items recorded in the fourth
quarter, which in the aggregate increased net income $2.3 million, or
approximately $1.10 per share. In the second quarter, a $1.0 million pre-tax
charge was recorded related to the settlement of a dispute with the former
shareholders of an acquired company. This amount was offset by a $1.0 million
pre-tax reduction in liabilities related to a favorable outcome of a dispute
with a former owner of an acquired dental practice. In the fourth quarter, a
non-taxable $2.9 million credit, net of related legal expenses, was recorded in
conjunction with a settlement of a dispute with the sellers of an affiliated
dental practice. This credit was offset by an income tax adjustment of $588,000
relating to goodwill amortization that is not deductible for tax purposes.

        Acquisitions. Since 1999, as a result of its limited availability of
additional capital, the Company significantly decreased its acquisition
activity. Per the terms of the Company's Credit Facility, the Company is
prohibited from making acquisitions without bank approval. The majority of the
Company's acquisitions occurred prior to 2000. Moreover, the Company sold its
Wisconsin operations consisting of 26 Dental Offices in December 2001. The
acquired dental practices to which the Company currently provides management and
administrative services are listed below:



                                       3
<PAGE>


<TABLE>
<CAPTION>
                                               NUMBER OF       NUMBER OF         DATE             EFFECTIVE DATE
DENTAL GROUP PRACTICE / MARKET               DENTAL OFFICES   DENTISTS (1)      FOUNDED           OF ACQUISITION
------------------------------                -------------   ------------    ------------    -----------------------
<S>                                              <C>             <C>           <C>            <C>
1996 existing market acquisitions                    1               1           1981         October 1996
1997 existing market acquisitions                    4               4          Various       Various
1998 existing market acquisitions                    6               6          Various       Various
1999 existing market acquisitions                    4               6          Various       Various
MacGregor Dental Centers, Houston                   15              42           1962         February 1996
Convenient Dental Care, Arkansas                     1               6           1982         November 1996
Arkansas Dental Health, Arkansas                     3               7           1984         January 1997
United Dental Care, Arkansas                         9              15           1990         April 1997
Dental Centers of Indiana, Indiana                  11              14           1980         August 1997
J.B. Hays, Arkansas                                  1               6           1994         October 1997
Three Peaks Dental Management, Colorado              6              10           1990         November 1997
Press Family Dental, San Antonio                     3              14           1971         November 1997
Dental America, Midland - Odessa                     2               4           1994         December 1997
Dental Care One, Ohio                                8              14           1979         March 1998
Managed Dental Care Centers, Austin & New
  Mexico                                             9              10           1995         June 1998
Valley Forge Dental Associates, Various             55             130           1995         September 1998
Talbert Dental, Arizona and Utah                    10              32           1973         September 1998
</TABLE>

--------------------------------------------------------------------------------
(1)     Includes full-time general dentists and specialists employed by or under
        contract with the applicable professional corporation.



        Existing Market Development. The Company commenced operations in 1983
with a group dental practice in Dallas. From its founding in 1983 through
December 31, 2001, the Company opened 28 additional Dental Offices on a de novo
basis (21 in Dallas-Fort Worth, three in Houston, two in San Antonio and one
each in Indiana and Atlanta.) The Company completed its first acquisition of a
solo practice in an existing market (Dallas-Fort Worth) in October 1996. The
Company purchased four solo practices in existing markets (three in Dallas-Fort
Worth and one in Houston) in 1997. The Company purchased seven solo practices in
existing markets (one in Dallas-Fort Worth, two in Indiana, two in San Antonio,
one in Wisconsin and one in Midland-Odessa) in 1998. The Company purchased seven
solo practices in existing markets (three in Dallas-Fort Worth, three in
Wisconsin and one in Georgia) in 1999 and in 2000 purchased one solo practice in
the Wisconsin market. In September 2001 one of the solo practices purchased in
the Company's Dallas-Fort Worth market during 1999 was closed and the patient
base was transferred to other Dental Offices. Of the five solo practices
acquired in the Company's former Wisconsin market, one was sold to a former
owner in May 2001 and the remaining four were sold in December 2001 to a company
formed by the investment firm of Bayview Capital Partners LP and the former
management personnel of the Wisconsin market.

         Patient revenue, net from the Company's Dallas-Fort Worth operations
increased $12.3 million, or 36.9%, to $45.7 million in 1999, increased $4.8
million, or 10.5%, to $50.5 million in 2000 and increased $1.8 million, or 3.6%,
to $52.3 million in 2001. Operating income for the Company's Dallas-Fort Worth
operations increased $3.3 million, or 63.2%, to $8.5 million in 1999, increased
$2.2 million, or 25.4%, to $10.7 million in 2000 and decreased $253,000, or
2.4%, to $10.4 million, excluding a charge for uncollectible unbilled
orthodontic receivables, in 2001.

        The average investment by the Company in the seventeen de novo Dental
Offices opened since January 1, 1996 was approximately $267,000, which includes
the cost of equipment, leasehold improvements and working capital associated
with the initial operations. Twelve de novo Dental Offices opened since January
1, 1996 began contributing


                                       4
<PAGE>
operating income to the Company within three months of opening. The remaining
five de novo Dental Offices opened since January 1, 1996 began contributing
operating income to the Company within four, five, five, seven and fifteen
months, respectively, of opening. Future de novo Dental Offices, however, may
require a greater investment by the Company and may not begin contributing
operating income to the Company within that period of time. Furthermore,
financial constraints may limit the Company's ability to open de novo Dental
Offices in the future. The Company expenses operating costs (other than costs
related to fixed assets) in connection with the establishment of a de novo
Dental Office as these costs are incurred.

COMPONENTS OF REVENUE AND EXPENSES

        The Company provides management and administrative services to dental
group practices under long-term administrative services agreements (the
"Administrative Services Agreements"). The Administrative Services Agreements
represent the Company's right to provide these services to the Dental Offices
during the 40-year term of the agreement. The Administrative Services Agreements
cannot be terminated by the related professional corporation without cause,
consisting primarily of bankruptcy or material default.

        Under the Administrative Services Agreements, the Company assumes
responsibility for providing all management and administrative services to the
dental group practices' business (including all operating expenses consisting of
the expenses incurred by the Company in connection with managing the Dental
Offices, including salaries and benefits for personnel other than dentists and
hygienists, dental supplies, dental laboratory fees, occupancy costs, equipment
leases, management information systems and other expenses related to the dental
practice operations) other than the provision of dental services and retains a
100% residual interest in the net income of the dental group practices. The
Company receives a management fee equal to the Company's costs plus the lower of
(i) 30% of the professional dental corporations and associations (the "P.C.s")
net revenues or (ii) the P.C.'s net pre-tax income. If net pre-tax income
exceeds 30% of the P.C.'s net revenues, the P.C. would retain the amount of
pre-tax income over 30% of the P.C.'s net revenues. The Company's net revenue
and operating results are significantly dependent upon the revenue of the dental
group practices. The Company has no material commitments or guarantees to the
dental group practices under the Administrative Services Agreements.

        Under the Administrative Services Agreements, the Company establishes a
"controlling financial interest" as defined by EITF 97-2, "Application of FASB
No. 94 and APB No. 16 to Physician Practice Management Entities and Certain
Other Entities under Contractual Management Arrangement" ("EITF 97-2"). In
addition, the Company has nominee shareholder arrangements with certain of the
dental group practices as defined by EITF 97-2. For these reasons, the Company
consolidates the financial statements of the dental group practices.

        Patient revenue, net ("Revenue") represents the revenue of the P.C.s to
whom the Company provides management and administrative services or of the
Company (in states in which ownership of dental practices by the Company is
permitted) reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Dental Offices.
Operating expenses consist of the expenses incurred by the Company or the P.C.s
in connection with the operation and management of the Dental Offices. These
include salaries and benefits paid to dentists and hygienists by the P.C.s or by
the Company in states in which ownership of dental practices by the Company is
permitted (Wisconsin only), salaries and benefits for personnel other than
dentists and hygienists, dental supplies, dental laboratory fees, occupancy
costs, advertising, equipment leases, management information systems and other
expenses related to dental practice operations, as well as depreciation and
amortization expense.

        Revenue is derived principally from fee-for-service Revenue and Revenue
from capitated managed dental care plans. Fee-for-service Revenue consists of
Revenue of the P.C.s or the Company (with respect to the former Wisconsin
operations) received from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment arrangement.
Managed dental care Revenue consists of Revenue of the P.C.s or the Company
received from capitated managed dental care plans, including capitation payments
and patient co-payments.

        Capitated managed dental care contracts are between dental benefits
organizations, the Company and the P.C.s (except with respect to the former
Wisconsin operations). Under the Administrative Services Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly


                                       5
<PAGE>

capitation payment for each plan member covered for a specific schedule of
services regardless of the quantity or cost of services to the participating
dental group practice obligated to provide them. This arrangement shifts the
risk of utilization of these services to the dental group practice providing the
dental services. Because the Company assumes responsibility under the
Administrative Services Agreements for all aspects of the operation of the
dental practices (other than the practice of dentistry) and thus bears all costs
of the P.C.s associated with the provision of dental services at the Dental
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Dental Offices under
capitated managed dental care plans is effectively shifted to the Company.
In addition, dental group practices participating in a capitated managed dental
care plan often receive co-payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays a percentage of reasonable charges that are billed by the dental
group practice for the dental services provided.

        The Company seeks to assist the Dental Offices in increasing
fee-for-service business by increasing the size of existing offices and
advertising. The Company then seeks to assist the Dental Offices to supplement
this fee-for-service business with Revenue from contracts with capitated managed
dental care plans. Fee-for-service Revenue accounted for 60.2%, 58.2% and 59.5%
of the Company's total Revenue for 2001, 2000 and 1999, respectively, and
managed dental care Revenue accounted for 39.8%, 41.8% and 40.5% in 2001, 2000
and 1999, respectively. As the Company has increased capacity by expanding
within its existing markets and into new markets, managed dental care Revenue
has contributed to overall higher utilization of the Company's facilities. Thus,
although the Company's fee-for-service business generally is more profitable
than its capitated managed dental care business on a per-patient and
per-procedure basis, capitated managed dental care business serves to increase
facility utilization and dentist productivity.

        The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable terms in such contracts. In addition, the profitability of managed
dental care Revenue varies from market to market depending on the level of
capitation payments and co-payments in proportion to the level of benefits
required to be provided.





                                       6
<PAGE>



RESULTS OF OPERATIONS

         The following table sets forth the percentages of Revenue represented
by certain items reflected in the Company's consolidated statements of income.
The information that follows should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                           -----------------------------------
                                                             2001         2000         1999
                                                             ----         ----         ----
<S>                                                         <C>          <C>          <C>
         Patient revenue, net                               100.0%       100.0%       100.0%
         Operating expenses:
            Provider salaries and benefits                   34.4         33.3         32.9
            Clinical and other salaries and benefits         26.9         26.8         26.1
            Dental supplies                                   5.1          5.0          5.1
            Laboratory fees                                   5.3          5.2          4.8
            Occupancy                                         5.0          4.9          4.9
            Advertising                                       1.0          1.3          1.5
            Other operating expenses                         13.1         11.7         10.8
            Strategic alternative costs                       0.1          1.1            -
            Depreciation and amortization                     5.4          5.3          5.2
                                                             ----         ----         ----
                                                             96.3         94.6         91.3
                                                             ----         ----         ----
         Operating income                                     3.7          5.4          8.7
         Interest expense, net                                4.8          5.0          3.8
         Minority interest in consolidated
            subsidiaries                                      0.1          0.1          0.1
         Loss on sale of subsidiary                           0.5            -            -
                                                             ----         ----         ----
         Income (loss) before income taxes                   (1.7)         0.3          4.8
         Income taxes                                         0.1          0.5          1.6
                                                             ----         ----         ----
         Net income (loss)                                   (1.8)%       (0.2)%        3.2%
                                                           ========     ========     ========
</TABLE>


YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

        Patient revenue, net. Revenue increased to $211.9 million for 2001 from
$211.3 million for 2000, an increase of $528,000, or 0.2%. Management changes
and high dentist turnover in the Company's Houston, Philadelphia, Georgia, New
Jersey and Colorado markets negatively impacted Revenue growth for 2001. The
combined Revenue of these markets for 2001 decreased $6.0 million, or 11.6%,
compared to 2000. The Company's remaining thirteen markets experienced an
increase in Revenue of $6.5 million, or 4.1%, for 2001 compared to 2000
primarily as a result of fee schedule increases and additional fee-for-service
patient volume.

        Fee-for-service revenue (i.e., revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $127.6 million for 2001 from $123.1 million
for 2000, an increase of $4.5 million, or 3.7%. This increase resulted primarily
from fee schedule increases and additional fee-for-service patient volume at the
Dental Offices. Managed dental care revenue (i.e., revenue from capitated
managed dental care plans, including capitation payments and patient
co-payments) decreased to $84.3 million for 2001 from $88.2 million for 2000, a
decrease of $3.9 million, or 4.5%. This decrease resulted primarily from the
elimination of several less profitable managed care plans partially offset by
fee increases in the remaining managed care plans. As a percentage of Revenue,
fee-for-service revenue increased to 60.2% for 2001 from 58.2% for 2000.

        Provider salaries and benefits. Provider salaries and benefits expense
represents compensation, benefits and related payroll costs for patient service
providers including dentists and hygienists. This expense increased to $72.9
million for 2001 from $70.5 million for 2000, an increase of $2.4 million, or
3.5%. This increase resulted primarily from higher dentist and hygienist
compensation in several markets and to a lesser extent from overall increases in
employee


                                       7
<PAGE>

benefit costs. In general, the dentists employed by the P.C.'s are compensated
based on a percentage of the cash collections related to their dental treatment
production. However, prior to converting to this payment method, it is the
Company's normal practice to pay new dentists a fixed salary for the first three
to six months of their employment. Due to the high dentist turnover,
particularly in the markets referred to in the Patient revenue, net discussion
above, the fixed salary expense is relatively high when compared against the
amount of collectible Revenue produced by the dentist. The Company believes that
it is necessary to incur this fixed salary expense in order to attract quality
dentists.

        Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense represents compensation, benefits and related payroll costs
for all Dental Office staff, excluding dentists and hygienists, and corporate
employees. This expense increased to $57.1 million for 2001 from $56.7 million
for 2000, an increase of $427,000, or 0.8%. Excluding severance payments
totaling $1.0 million that were made to a former executive of the Company in
2000, the increase was $1.4 million, or 2.6%. This increase resulted primarily
from annual merit increases and to a lesser extent increased employee benefit
costs. As a percent of Revenue, clinical and other salaries and benefits expense
increased slightly to 26.9% for 2001 from 26.8% for 2000.

        Dental supplies. Dental supplies expense represents all direct supply
costs used in patient treatment programs. This expense increased to $10.7
million for 2001 from $10.5 million for 2000, an increase of $210,000, or 2.0%.
This increase resulted primarily from increased supply costs. As a percent of
Revenue, dental supplies expense increased slightly to 5.1% for 2001 from 5.0%
for 2000.

        Laboratory fees. Laboratory fee expense represents all external lab work
required for patient treatment programs. The Company currently operates two
internal labs in its Arkansas and Cleveland markets. This expense increased to
$11.3 million for 2001 from $11.1 million for 2000, an increase of $244,000, or
2.2%. This increase resulted primarily from increased dental procedures
requiring the use of a laboratory and increased material costs used in the
production of crowns. As a percent of Revenue, laboratory fee expense increased
slightly to 5.3% for 2001 from 5.2% for 2000.

        Occupancy. Occupancy expense represents operating leases and utilities
associated with the Company's Dental Offices and corporate office. This expense
increased to $10.5 million for 2001 from $10.3 million for 2000, an increase of
$241,000, or 2.4%. This increase resulted primarily from higher costs associated
with certain lease renewals and was partially offset by five Dental Office
closures during 2001. The Company relocated its corporate office in September
2001 and expects to realize a lease expense reduction of approximately $200,000
per year beginning in 2002 relating to this relocation. As a percent of Revenue,
occupancy expense increased slightly to 5.0% for 2001 from 4.9% for 2000.

        Advertising. Advertising expense represents marketing efforts to
communicate the multiple treatment programs available at the Company's Dental
Offices. The Company primarily uses direct mailing to potential customers within
a certain distance of its Dental Offices and periodically uses television and
radio advertisements in its larger markets. This expense decreased to $2.0
million for 2001 from $2.7 million for 2000, a decrease of $647,000, or 24.1%.
This decrease resulted from cost control initiatives implemented to reduce
marketing costs. As a percent of Revenue, advertising expense decreased to 1.0%
for 2001 from 1.3% for 2000.

        Other operating expenses. Other operating expenses represents
professional services (other than dentistry), travel, bank fees, insurance, bad
debt expense, telephone, office supplies, local taxes and other miscellaneous
expenses incurred at the Dental Offices and corporate office. These expenses
increased to $27.6 million for 2001 from $24.7 million for 2000, an increase of
$2.9 million, or 11.9%. This increase resulted primarily from higher legal fees
incurred in connection with management changes and high dentist turnover in the
five markets referred to in the Patient revenue, net discussion above and the
sale of the Company's Wisconsin operations in December 2001 and computer
conversions in certain markets in a continued effort to standardize the
Company's clinical management system throughout its national network of Dental
Offices. In addition to the computer conversions discussed above, expanded
capabilities within the Company's clinical management system have enabled the
Company to more accurately track its orthodontic contracts. In connection with
these expanded capabilities, the Company recorded a pre-tax charge of $1.0
million related to the write-off of unbilled orthodontic receivables in the
fourth quarter of 2001. As a percent of Revenue, other operating expenses
increased to 13.1% for 2001 from 11.7% for 2000.


                                       8
<PAGE>

        Strategic alternative costs. Strategic alternative costs were $317,000
for 2001 and $2.3 million for 2000 and consist primarily of legal and
professional fees incurred from efforts to explore strategic alternatives in
order to maximize shareholder value.

        Depreciation and amortization. Depreciation and amortization expense
increased to $11.5 million for 2001 from $11.1 million for 2000, an increase of
$406,000, or 3.7%. This increase resulted primarily from a goodwill impairment
expense of $421,000 associated with one dental office closure in the Company's
Dallas-Fort Worth market in 2001.

        Operating income. Operating income decreased to $7.8 million for 2001
from $11.5 million for 2000, a decrease of $3.7 million, or 32.2%. This decrease
resulted primarily from the negative impact of management changes and high
dentist turnover in the Company's Houston, Philadelphia, Georgia, New Jersey and
Colorado markets. The combined operating income of these markets for 2001
decreased $4.5 million, or 137.4%, compared to 2000. Additionally, operating
income was negatively impacted by the increased cost of labor in certain of the
Company's markets and by higher legal fees and computer conversion costs. As a
percent of Revenue, operating income decreased to 3.7% for 2001 from 5.4% for
2000. This decrease was due principally to higher provider salaries and benefits
expense and other operating expenses and to a lesser extent slightly higher
clinical and other salaries and benefits expense, dental supplies expense,
laboratory fee expense, occupancy and depreciation and amortization expense as a
percentage of Revenue partially offset by lower advertising and strategic
alternative costs as a percentage of Revenue.

        Interest expense, net. Interest expense, net decreased to $10.2 million
for 2001 from $10.5 million for 2000, a decrease of $339,000, or 3.2%. The
Company had lower average outstanding debt balances and lower interest rates for
2001 compared to 2000. Average debt outstanding under the Credit Facility
totaled $79.0 million for 2001 compared to average debt outstanding of $81.5
million for 2000. The average interest rate for 2001 was approximately 9.6%
compared to a rate of approximately 10.3% for 2000. The decrease in interest
expense would have been greater for 2001 but was negatively impacted by interest
rate hedges entered into by the Company prior to the decrease in the prime
lending rate during 2001.

        Minority interest in consolidated subsidiaries. Minority interest in
consolidated subsidiaries decreased to $127,000 for 2001 from $278,000 for 2000,
a decrease of $151,000, or 54.1%. This decrease resulted from lower net income
in markets that are not wholly owned by the Company for 2001 compared to 2000.
During 2001, the Company purchased the remaining 6.25% of its Georgia market.

        Loss on sale of subsidiary. On December 31, 2001, the Company sold its
Wisconsin operations, including one office located in Minnesota, to Midwest
Dental, Inc., a company formed by the investment firm of Bayview Capital
Partners LP, of Minneapolis, Minnesota and the Company's former management
personnel for the Wisconsin operations. In connection with the sale the Company
recorded a $1.1 million loss, which is not recognized for tax purposes.

        Income taxes. Income tax expense decreased to $200,000 for 2001 from
$1.2 million for 2000, a decrease of $974,000, or 83.0%. This decrease resulted
from lower income (loss) before income taxes, which decreased to a loss before
income taxes of $3.6 million for 2001 from net income before income taxes of
$692,000 for 2000, a decrease of $4.3 million, or 618.2%.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

        Patient revenue, net. Revenue increased to $211.3 million for 2000 from
$204.1 million for 1999, an increase of $7.2 million, or 3.6%. This increase
resulted primarily from same store revenue growth generated by the
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of twenty existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office
and the acquisition of one dental practice. The revenue initiatives were
partially offset by severe winter weather experienced in many of the Company's
markets in December 2000, which resulted in several offices being closed for up
to five business days during the month.

        Fee-for-service Revenue (i.e., revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $123.1 million for 2000 from $121.4 million


                                       9
<PAGE>

for 1999, an increase of $1.7 million, or 1.4%. This increase resulted primarily
from same store revenue growth generated by the implementation of revenue
enhancement initiatives in 2000 including patient focused marketing programs and
the expansion or relocation of twenty existing Dental Offices and to a lesser
extent the opening of one de novo Dental Office and the acquisition of one
dental practice. The revenue initiatives were partially offset by severe winter
weather experienced in many of the Company's markets in December 2000, which
resulted in several offices being closed for up to five business days during the
month. Managed dental care Revenue (i.e., revenue from capitated managed dental
care plans, including capitation payments and patient co-payments) increased to
$88.2 million for 2000 from $82.7 million for 1999, an increase of $5.5 million,
or 6.8%. This increase resulted primarily from several new managed care
contracts, which had more favorable capitated payments and co-payments as
compared with previous contracts. As a percent of Revenue, fee-for-service
Revenue decreased to 58.2% for 2000 from 59.5% for 1999.

        Provider salaries and benefits. Provider salaries and benefits expense
increased to $70.5 million for 2000 from $67.1 million for 1999, an increase of
$3.4 million, or 5.1%. This increase resulted primarily from increased dentist
and hygienist compensation due to a higher level of production at the Dental
Offices and to a lesser extent the expansion or relocation of twenty existing
Dental Offices, the opening of one de novo Dental Office and the acquisition of
one dental practice. As a percent of Revenue, provider salaries and benefits
expense increased to 33.3% for 2000 from 32.9% for 1999. This increase was due
principally to increased dentist compensation as a percentage of revenue in
several of the Company's markets.

        Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $56.7 million for 2000 from $53.2 million for
1999, an increase of $3.5 million, or 6.5%. This increase resulted primarily
from annual merit increases, increased costs related to employee benefits and
$1.0 million in severance payments made to a former executive of the Company and
to a lesser extent the expansion or relocation of twenty existing Dental
Offices, the opening of one de novo Dental Office and the acquisition of one
dental practice. As a percent of Revenue, clinical and other salaries and
benefits expense increased to 26.8% for 2000 from 26.1% for 1999. This increase
was due primarily to $1.0 million in severance payments made to a former
executive of the Company and to a lesser extent due to the higher costs of
employee benefits.

        Dental supplies. Dental supplies expense increased to $10.5 million for
2000 from $10.4 million for 1999, an increase of $148,000, or 1.4%. This
increase resulted primarily from increased production at the Dental Offices and
to a lesser extent the expansion or relocation of twenty existing Dental
Offices, the opening of one de novo Dental Office and the acquisition of one
dental practice. As a percent of Revenue, dental supplies expense decreased
slightly to 5.0% for 2000 from 5.1% for 1999.

        Laboratory fees. Laboratory fee expense increased to $11.1 million for
2000 from $9.9 million for 1999, an increase of $1.2 million, or 11.9%. This
increase resulted primarily from increased production at the Dental Offices,
increased use of higher quality crowns as well as an increase in material costs
used in the production of crowns and to a lesser extent the expansion or
relocation of twenty existing Dental Offices, the opening of one de novo Dental
Office and the acquisition of one dental practice. As a percent of Revenue,
laboratory fee expense increased to 5.2% for 2000 from 4.8% for 1999. This
increase was due primarily to increased usage of higher quality, more costly
crowns as well as an increase in material costs used in the production of
crowns.

        Occupancy. Occupancy expense increased to $10.3 million for 2000 from
$10.1 million for 1999, an increase of $199,000, or 2.0%. The expense associated
with the opening of one de novo Dental Office, the expansion or relocation of
twenty existing Dental Offices and the acquisition of one dental practice was
partially offset by three Dental Office closures during 2000. As a percent of
Revenue, occupancy expense remained constant at 4.9% for 2000 and 1999.

        Advertising. Advertising expense decreased to $2.7 million for 2000 from
$3.1 million for 1999, a decrease of $389,000, or 12.7%. This decrease resulted
primarily from cost control initiatives that included the use of lower cost
advertising. A greater emphasis was placed on direct mailings and other types of
print advertising as opposed to the more expensive television and radio
advertising. As a percent of Revenue, advertising expense decreased to 1.3% for
2000 from 1.5% for 1999. This decrease resulted from the use of lower cost
advertising and the leveraging of advertising expense against increased revenue.


                                       10
<PAGE>

        Other operating expenses. Other operating expenses increased to $24.7
million for 2000 from $22.0 million for 1999, an increase of $2.7 million, or
12.1%. This increase resulted primarily from a $2.9 million credit recorded in
the fourth quarter of 1999 representing the settlement of a dispute with the
sellers of an affiliated dental practice. As a percent of Revenue, other
operating expenses increased to 11.7% for 2000 from 10.8% for 1999. This
increase was due principally to the $2.9 million credit recorded in the fourth
quarter of 1999.

        Strategic alternative costs. Strategic alternative costs were $2.3
million for 2000 resulting primarily from legal, investment banking and other
professional fees incurred from efforts to explore strategic alternatives in
order to maximize shareholder value. These efforts included exploring potential
strategic transactions, such as the possible sale or merger of the Company or a
subordinated debt transaction.

        Depreciation and amortization. Depreciation and amortization expense
increased to $11.1 million for 2000 from $10.5 million for 1999, an increase of
$562,000, or 5.3%. This increase resulted primarily from additional goodwill
amortization and depreciation expense on fixed assets associated with the
expansion or relocation of twenty existing Dental Offices, the opening of one de
novo Dental Office and the acquisition of one dental practice.

        Operating income. Operating income decreased to $11.5 million for 2000
from $17.8 million for 1999, a decrease of $6.3 million, or 35.4%. This decrease
resulted primarily from a $2.9 million credit recorded in the fourth quarter of
1999 representing the settlement of a dispute with the sellers of an affiliated
dental practice, $2.3 million in strategic alternative costs in 2000 incurred
from efforts to explore strategic alternatives, $1.0 million in severance
payments made to a former executive of the Company in the fourth quarter of 2000
and increased salary and laboratory costs at the dental offices. As a percent of
Revenue, operating income decreased to 5.4% for 2000 from 8.7% for 1999. This
decrease was due principally to the items discussed above.

        Interest expense, net. Interest expense, net increased to $10.5 million
for 2000 from $7.7 million for 1999, an increase of $2.8 million, or 36.9%. This
increase resulted primarily from amortization expense related to capitalized
loan fees which includes the amortization of warrants awarded to the Company's
bank syndicate in conjunction with an amendment to the Company's loan agreement
associated with its Credit Facility. Additionally, the Company had higher
average outstanding debt balances and higher interest rates in 2000 than in
1999. Average debt outstanding under the Credit Facility totaled $81.5 million
for 2000 compared to average debt outstanding of $78.5 million for 1999. The
average interest rate for 2000 was approximately 10.3% compared to a rate of
approximately 8.7% in 1999.

        Minority interest in consolidated subsidiaries. Minority interest in
consolidated subsidiaries increased to $278,000 for 2000 from $224,000 for 1999,
an increase of $54,000, or 24.1%. This increase resulted from higher net income
in markets that are not wholly-owned by the Company in 2000 compared to 1999.

        Income taxes. Income tax expense decreased to $1.2 million for 2000 from
$3.3 million for 1999, a decrease of $2.1 million, or 64.5%. This decrease
resulted from lower income before income taxes, which decreased to $692,000 for
2000 from $9.9 million for 1999, a decrease of $9.2 million, or 93.0%.








                                       11
<PAGE>



QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

        The following table sets forth unaudited quarterly consolidated
operating results for each of the Company's last eight quarters ended December
31, 2001. This information has been prepared by the Company on a basis
consistent with the Company's audited consolidated financial statements and
includes all adjustments (consisting only of normal recurring adjustments) that
management considers necessary for a fair presentation of the data. These
quarterly consolidated results are not necessarily indicative of future
consolidated results of operations. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                                                             QUARTERS ENDED
                                         ----------------------------------------------------------------------------------------
                                          DEC. 31,    SEPT. 30,  JUNE 30,   MAR. 31,   DEC. 31,   SEPT. 30,  JUNE 30,   MAR. 31,
                                           2001 (1)     2001       2001       2001     2000 (2)     2000       2000       2000
                                          --------    ---------  --------   --------   --------   ---------  --------   --------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>         <C>        <C>        <C>        <C>        <C>        <C>        <C>
Patient revenue, net...............       $ 51,646    $ 51,721   $ 53,685   $ 54,814   $ 50,167   $ 51,979   $ 54,170   $ 55,023
Operating expenses:
  Provider salaries and benefits...         18,071      17,933    18,327      18,602     17,068     17,411    18,077      17,928
  Clinical and other salaries and
   benefits........................         13,771      14,005    14,421      14,886     15,409     13,819    13,844      13,585
  Dental supplies..................          2,775       2,598     2,705       2,666      2,582      2,423     2,561       2,968
  Laboratory fees..................          2,790       2,778     2,853       2,891      2,757      2,825     2,622       2,864
  Occupancy........................          2,489       2,743     2,602       2,672      2,549      2,609     2,524       2,583
  Advertising......................            425         414       585         613        680        758       579         667
  Other operating expenses.........          8,560       6,569     6,572       5,921      6,270      6,165     5,868       6,390
  Strategic alternative costs......              -           -        58         260      1,288        586       473           -
  Depreciation and amortization....          3,222       2,757     2,773       2,765      2,883      2,755     2,757       2,715
                                          ---------   ---------   ------    --------   ---------  ---------   ------    --------
                                            52,103      49,797    50,896      51,276     51,486     49,351    49,305      49,700
                                          ---------   ---------   ------    --------   ---------  ---------   ------    --------
Operating income (loss)............           (457)      1,924     2,789       3,538     (1,319)     2,628     4,865       5,323
Interest expense, net..............          2,517       2,604     2,504       2,562      2,694      2,688     2,564       2,582
Minority interest in consolidated
  subsidiaries                                   9          25        20          73         33         77        81          87
Loss on sale of subsidiary                    1067           -         -           -          -          -         -           -
                                          ---------   ---------   ------    --------   ---------  ---------   ------    --------
Income (loss) before income taxes..         (4,050)       (705)      265         903     (4,046)      (137)    2,220       2,654
Income taxes (benefit) ............           (437)        (39)      174         502     (1,037)        16     1,001       1,193
                                          ---------   ---------   ------    --------   ---------  ---------   ------    --------
Net income (loss)..................       $ (3,613)   $   (666)   $   91    $    401   $ (3,009)  $   (153)   $1,219    $  1,461
                                          =========   =========   ======    ========   =========  =========   ======    ========


Net income (loss) per common share        $  (1.67)   $ (0.31)    $ 0.04    $   0.19   $  (1.40)  $  (0.07)   $ 0.57    $   0.68
                                          =========   =========   ======    ========   =========  =========   ======    ========
Net income (loss) per common share-
  assuming dilution                       $  (1.67)   $ (0.31)    $ 0.04    $   0.18   $  (1.40)  $  (0.07)   $ 0.55    $   0.66
                                          =========   =========   ======    ========   =========  =========   ======    ========
Weighted average number of common
  shares outstanding                         2,167       2,167     2,160       2,160      2,151      2,151     2,141       2,140
                                          =========   =========   ======    ========   =========  =========   ======    ========
Weighted average number of common and
  common equivalent shares outstanding       2,167       2,167     2,226       2,225      2,151      2,151     2,229       2,219
                                          =========   =========   ======    ========   =========  =========   ======    ========
</TABLE>

(1)     Includes the effect of approximately $1.0 million (pre-tax) related to
        the write-off of unbilled orthodontic receivables.

(2)     Includes the effect of approximately $1.0 million (pre-tax) in severance
        payments made to a former executive of the Company.






                                       12
<PAGE>


<TABLE>
<CAPTION>
                                                                            QUARTERS ENDED
                                         ---------------------------------------------------------------------------------------
                                          DEC. 31,   SEPT. 30,  JUNE 30,   MAR. 31,    DEC. 31,   SEPT. 30,  JUNE 30,   MAR. 31,
                                          2001 (1)     2001       2001       2001      2000 (2)     2000       2000       2000
                                         ----------  ---------  --------  ---------   ---------   ---------  --------   --------
                                                                         PERCENTAGE OF REVENUE
                                         ---------------------------------------------------------------------------------------
<S>                                         <C>       <C>        <C>        <C>         <C>       <C>        <C>        <C>
Patient revenue, net...............         100.0%    100.0%     100.0%     100.0%      100.0%    100.0%     100.0%     100.0%
Operating expenses:
  Provider salaries and benefits...          35.0      34.7        34.1      33.9        34.0      33.5       33.4       32.6
  Clinical and other salaries and
  benefits.........................          26.7      27.1        26.9      27.2        30.7      26.6       25.5       24.7
  Dental supplies..................           5.4       5.0         5.0       4.9         5.1       4.7        4.7        5.4
  Laboratory fees..................           5.4       5.4         5.3       5.3         5.5       5.4        4.8        5.2
  Occupancy........................           4.8       5.3         4.8       4.9         5.1       5.0        4.7        4.7
  Advertising......................           0.8       0.8         1.1       1.1         1.4       1.4        1.1        1.2
  Other operating expenses.........          16.6      12.7        12.3      10.7        12.5      11.9       10.8       11.6
  Strategic alternative costs......             -         -         0.1       0.5         2.6       1.1        0.9          -
  Depreciation and amortization....           6.2       5.3         5.2       5.0         5.7       5.3        5.1        4.9
                                          -------   -------     -------   -------     -------   -------    -------    -------
                                            100.9      96.3        94.8      93.5       102.6      94.9       91.0       90.3
                                          -------   -------     -------   -------     -------   -------    -------    -------
Operating income (loss)............          (0.9)      3.7         5.2       6.5        (2.6)      5.1        9.0        9.7
Interest expense, net..............           4.8       5.1         4.7       4.7         5.4       5.2        4.7        4.7
Minority interest in consolidated
  subsidiaries.....................             -         -           -       0.2         0.1       0.2        0.2        0.2
Loss on sale of subsidiary.........           2.1         -           -         -           -         -          -          -
                                          -------   -------     -------   -------     -------   -------    -------    -------
Income (loss) before income taxes..          (7.8)     (1.4)        0.5       1.6        (8.1)     (0.3)       4.1        4.8
Income taxes (benefit).............          (0.8)     (0.1)        0.3       0.9        (2.1)        -        1.8        2.1
                                          -------   -------     -------   -------     -------   -------    -------    -------
Net income (loss) .................          (7.0%)    (1.3%)       0.2%      0.7%       (6.0%)    (0.3%)      2.3%       2.7%
                                          =======   =======     =======   =======     =======   =======    =======    =======
</TABLE>

(1)     Includes the effect of approximately $1.0 million (pre-tax) related to
        the write-off of unbilled orthodontic receivables.

(2)     Includes the effect of approximately $1.0 million (pre-tax) in severance
        payments made to a former executive of the Company.


LIQUIDITY AND CAPITAL RESOURCES

        Because the Company's Credit Facility terminates on July 1, 2002 and the
Company is currently in default with the terms of the Credit Facility under the
minimum EBITDA and minimum net worth covenants, the Company was required to
reclassify the entire outstanding amount under the Credit Facility to current
liabilities from long-term debt. This reclassification resulted in the Company
having a $58.5 million working capital deficit at December 31, 2001. The Company
is actively engaged in finding a long-term solution to the financial covenant
defaults. In this regard, the Company has engaged Bank of America Securities to
explore strategic alternatives such as a sale of the Company, an equity
investment in the Company, the issuance of debt securities or a sale of all or a
portion of the assets of the Company. However, there can be no assurance that
the Company will be successful in entering into an agreement to consummate any
strategic alternative or that the Company's lenders will agree to any strategic
alternative on terms acceptable to the Company or at all. Current liabilities
consisted of $2.0 million in accounts payable, $2.5 million in accrued payroll,
$3.8 million in accrued liabilities, $4.9 million in amounts payable to
affiliated dental group practices as consideration for accounts receivable
acquired from such group practices and $67.6 million in current maturities of
notes payable and capital lease obligations. Current liabilities were partially
offset by current assets of $22.3 million, consisting of $3.8 million in cash
and cash equivalents, $14.5 million in accounts receivable, net of allowances,
prepaid expenses and other current assets of $3.5 million and an income tax
receivable of $513,000. The Company's principal sources of liquidity as of
December 31, 2001 consisted of cash and cash equivalents and net accounts
receivable.

        For 2001 and 2000, cash provided by operations was $12.1 million and
$11.3 million, respectively.

        Cash provided by investing activities was $5.6 million for 2001. Cash
used in investing activities was $8.7 million for 2000. For 2001, the Company
received $9.0 million from the sale of its Wisconsin operations, net of deal
costs and required escrow amounts. This amount was partially offset by $393,000
utilized to meet contingent payments for acquisitions completed in prior
periods, $199,000 used to purchase the remaining 6.25% of the Company's Georgia
market and $2.8 million invested in the purchase of additional property and
equipment. For 2000, $4.7 million was utilized to meet contingent payments for
acquisitions completed in prior periods, $751,000 was utilized for acquisitions,
$3.1 million was invested in the purchase of additional property and equipment
and $154,000 was utilized for other


                                       13
<PAGE>

investing activities.

        For 2001, cash used in financing activities was $16.9 million primarily
comprised of the repayment of $16.8 million in outstanding debt. For 2000, cash
used in financing activities was $4.5 million primarily comprised of the
repayment of $6.8 million in outstanding debt offset by $2.7 million in net
borrowings.

        The Company has a Credit Facility with a bank syndicate, which expires
by its terms on July 1, 2002. At December 31, 2001, the Company had $67.3
million outstanding under the Credit Facility. The amounts outstanding under the
Credit Facility bear interest at the lead lender's prime rate plus three percent
with interest payments due on a monthly basis. The Credit Facility requires the
Company to repay principal based on a schedule whereby monthly payments are made
aggregating $2.0 million and $2.3 million in the first quarter of 2002 and two
months ended May 31, 2002, respectively. An additional principal payment will be
required on April 30, 2002 if the Company exceeds certain cash flow levels. A
$500,000 fee is due on April 30, 2002 if a specified threshold above the
required amortization is not met. Additionally, the lenders will receive
warrants to purchase shares of the Company's Common Stock at an Exercise Price
of $0.01 per share (per the Warrant agreement dated April 1, 2001), equal to 5%
of the outstanding shares of the Company's Common Stock as of July 1, 2002, if
all outstanding debt is not paid in full by July 1, 2002. The Credit Facility
prohibits the Company from incurring additional indebtedness, incurring liens,
disposing of assets, making investments or making acquisitions without bank
approval, and requires the Company to maintain certain financial covenants.
These covenants require the Company to maintain minimum total net worth of $66.5
million as of December 31, 2001; minimum EBITDA, on a trailing three month
basis, of $6.0 million as of December 31, 2001; and a limit on capital
expenditures of $3.0 million from April 1, 2001 through December 31, 2001. All
covenants are measured monthly and minimum thresholds for the minimum total net
worth and minimum EBITDA covenants fluctuate in future periods. The Credit
Facility is secured by all of the assets of the Company.

        At December 31, 2001, the Company was in default with the terms of the
Credit Facility under the minimum EBITDA and minimum net worth covenants.
Revenue declines in the Company's Houston, Philadelphia, Georgia, New Jersey and
Colorado markets, which resulted in lower than expected EBITDA levels,
contributed to the defaults. Although the Company is attempting to negotiate an
amendment to its Credit Agreement and to secure a waiver of the defaults and an
extension of the Credit Facility, there can be no assurance that the Company's
lenders will grant a waiver or agree to an amendment on terms acceptable to the
Company or at all. The Company has made all required principal and interest
payments related to its Credit Agreement. However, the Company agreed to make
the monthly principal amounts described above prior to the sale of its Wisconsin
operations. The loss of the cash flow from the Wisconsin operations has
adversely affected the Company's ability to make these payments and avoid a
payment default under the Credit Facility. It is unclear whether the Company's
remaining operations will provide sufficient cash flow to make these payments on
a timely basis.

        On February 7, 2002, the Company's lenders notified the Company that
they were exercising their option to impose the default interest rate under the
Credit Agreement, which is equal to the lead lender's prime rate plus six
percent, for the remaining duration of the Company's default. The default rate
will significantly increase the Company's interest payments under the Credit
Facility and will negatively impact the Company's liquidity. Moreover, for as
long as the Company remains in default, the Company's lenders have the right to
accelerate the maturity of the Company's debt under the Credit Facility and to
use cash balances in the Company's bank accounts to set off a portion of the
debt. The Company does not have cash available to pay off its total indebtedness
under the Credit Facility and its financial condition and results of operations
would be materially and adversely affected by the lenders' use of its available
cash to set off a portion of the debt.

        The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, it is unclear whether the
Company will be able to make its April and May principal payments described
above that were agreed to prior to the sale of its Wisconsin operations due to
the Company's lower monthly cash flow. The Credit Facility expires by its terms
on July 1, 2002, and all of the Company's debt thereunder will then be due. The
Company will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility, raising substantial
doubt about its ability to continue as a going concern. In this regard, the
Company has engaged Bank of America Securities LLC to explore strategic
alternatives such as a sale of the Company, an equity investment in the Company,
the issuance of debt securities or a sale of all or a portion of the Company's
assets. However, there can be no assurance that the Company will be successful
in entering into an agreement to consummate any strategic alternative or that
the Company's lenders will agree to any strategic alternative on terms
acceptable to the Company or at all.

        In the event the Company is unable to refinance this indebtedness before
July 1, 2002, its lenders may foreclose on the Company's assets or force the
Company into bankruptcy upon maturity of the existing indebtedness, in which
circumstances the Company's equity holders may experience a loss equal to the
amount of their investment in the Company's Common Stock. In the event the
Company is unable to refinance the indebtedness on terms as favorable as the
terms of the existing indebtedness, the Company is likely to experience a
material and adverse effect


                                       14
<PAGE>

on its financial condition and results of operations.

        In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for certain financial
instruments, including interest rate swap agreements. The Company has
participated in interest rate hedging agreements to manage its interest rate
exposure. The Company adopted SFAS No. 133 on January 1, 2001 and its existing
interest rate hedges were designated as cash flow hedges. The effective portion
of the gain or loss on a cash flow hedge must be reported as a component of
other comprehensive income and be reclassified into earnings in the same period
or periods during which the hedged forecasted transaction affects earnings. The
ineffective portion, if any, of the gain or loss on a cash flow hedge must be
recognized currently in earnings. The Company paid $925,000 in connection with
its interest rate hedging agreements during 2001 due to decreases in the prime
lending rate throughout the year. The interest rate hedging agreements expired
on December 31, 2001.


CRITICAL ACCOUNTING POLICIES

        In December 2001, the SEC requested that all registrants list their most
"critical accounting policies" in "Managements Discussions and Analysis of
Financial Condition and Results of Operations." The SEC indicated that a
"critical accounting policy": is one that is both important to the portrayal of
the company's financial condition and results of operations and requires
management's most difficult, subjective or complex judgements, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The process of preparing financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to use estimates and assumptions to determine certain of the Company's
assets, liabilities, revenues and expenses. The Company bases these estimates
and assumptions upon the best information available during the period in which
the Company accounts for its results. These estimates and assumptions could
change materially as conditions within and beyond the Company's control change
or as further information becomes available. Accordingly, actual results could
differ from estimates. The most significant estimates made by management
include:

        -       contractual and bad debt allowances; and
        -       valuation of long-lived and intangible assets and goodwill.

                        The following is a discussion of the Company's critical
accounting policies and the related management estimates and assumptions
necessary in determining the value of related assets or liabilities. A full
description of all significant accounting policies is included in Note 2 to the
Consolidated Financial Statements included in this Form 10-K.

Contractual and Bad Debt Allowances

        Management must make estimates of contractual allowances related to
current period Revenue. Management analyzes historical collection adjustment
experience, current economic trends, client negotiation trends and changes in
client billing procedures when evaluating the adequacy of the contractual
allowances. Significant management judgements and estimates must be made and
used in connection with establishing the contractual allowances in any
accounting period. Material differences could result in the amount and timing of
the Company's Revenue for any period if management made different judgement or
utilized different estimates. The provision for contractual allowances amounted
to $5.1 million in 2001. Similarly, management must make estimates of the
uncollectibility of accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical billing adjustments, collections and
bad debts, customer concentrations, customer credit-worthiness, current economic
trends and challenges in customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. The Company's accounts receivable balance
was $14.4 million, net of allowances of $10.2 million as of December 31, 2001.

Valuation of the Lon-Lived and Intangible Assets and Goodwill

        The Company assesses the impairment of long-lived and intangible assets
and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which


                                       15
<PAGE>

could trigger an impairment review include the following:

        -       Significant underperformance relative to expected historical or
                projected future operating results;
        -       Significant changes in the manner of the use of the acquired
                assets or the strategy for the Company's overall business;
        -       Significant negative industry or economic trends; and
        -       Significant decline in estimated market capitalization relative
                to net book value.

        Generally accepted accounting principles requires a write down of
intangible assets if such assets are determined to be impaired. Under current
accounting standards, an impairment of a long-lived asset is considered to have
occurred when the estimated undiscounted future cash flows related to the assets
are less than the carrying value of the asset. Estimates of future cash flows
involve consideration of numerous factors, depending upon the specific asset
being assessed. When the Company determines that the carrying value of
long-lived assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, it measures any impairment based upon a
projected discounted cash flow method using a discounted rate determined by the
Company's management to be commensurate with the risk inherent in the Company's
current business model. Net identifiable intangible assets and goodwill were
assessed at $114.6 million as of December 31, 2001. The value of these projected
discounted cash flows could be subjected to change based on differences in the
assumptions noted above.

        In June 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 prescribes the accounting for intangible assets acquired
individually or with a group of other assets. The amortization of existing
goodwill ceased as of December 31, 2001. Any goodwill resulting from future
acquisitions will not be amortized. SFAS No. 142 also establishes a new method
of testing goodwill for impairment on an annual basis or on an interim basis if
an event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. The adoption of SFAS No. 142 will
result in the Company's discontinuation of amortization of its goodwill. The
Company is currently assessing the impact of SFAS No. 142 and has not yet
determined the full effect this statement will have on its consolidated
financial position or results of operations. However, had SFAS No. 142 been
utilized beginning January 1, 2001, the Company's pre-tax income would have been
increased by $5.6 million for the year ended December 31, 2001, excluding an
impairment charge of $421,000 in connection with a Dental Office closure in the
Company's Dallas-Fort Worth market, which was the amortization expense charged
to earnings under current accounting standards. The Company will be required to
test its goodwill for impairment under the new standard beginning January 1,
2002. The Company expects to complete its initial review during the second
quarter of 2002. The Company expects to record a significant impairment charge
related to certain of its markets upon completion of the initial impairment
review. All goodwill tests subsequent to January 1, 2002 that result in an
impairment to goodwill would have an adverse effect on the Company's results of
operations.





                                       16
<PAGE>



CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

RISKS ASSOCIATED WITH HIGH LEVELS OF INDEBTEDNESS

        The Company is subject to all of the risks normally associated with
incurring high levels of indebtedness relative to available cash flow from
operations, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest. At December 31, 2001, the
Company had $67.3 million of outstanding indebtedness under its Credit Facility.
This indebtedness matures on July 1, 2002 and there is a significant risk that
the existing indebtedness will not be able to be refinanced or that the terms of
such refinancing will not be as favorable as the terms of the existing
indebtedness. Additionally, at December 31, 2001, the Company was in default
with the terms of the Credit Facility under the minimum EBITDA and minimum net
worth covenants and on February 7, 2002, the Company's lenders notified the
Company that they were exercising their option to impose the default interest
rate under the Credit Agreement, which is equal to the lead lender's prime rate
plus six percent, for the remaining duration of the Company's default. The
default rate will significantly increase the Company's interest payments under
the Credit Facility and will negatively impact the Company's liquidity.
Moreover, for as long as the Company remains in default, the Company's lenders
have the right to accelerate the maturity of the Company's debt under the Credit
Facility and foreclose on the Company's assets and to use cash balances in the
Company's bank accounts to set off a portion of the debt. The Company does not
have cash available to pay off its debt under the Credit Facility and its
financial condition and results of operations would be materially and adversely
affected by the lenders' use of its available cash to set off a portion of the
debt.

        The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, it is unclear whether the
Company will be able to make its April and May principal payments described
above that were agreed to prior to the sale of its Wisconsin operations due to
the Company's lower monthly cash flow. The Credit Facility expires by its terms
on July 1, 2002, and all of the Company's debt thereunder will then be due. The
Company will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility, raising substantial
doubt about its ability to continue as a going concern. In this regard, the
Company has engaged Bank of America Securities LLC to explore strategic
alternatives such as a sale of the Company, an equity investment in the Company,
the issuance of debt securities or a sale of all or a portion of the Company's
assets. However, there can be no assurance that the Company will be successful
in entering into an agreement to consummate any strategic alternative or that
the Company's lenders will agree to any strategic alternative on terms
acceptable to the Company or at all.

        In the event the Company is unable to refinance this indebtedness before
July 1, 2002, its lenders may foreclose on the Company's assets or force the
Company into bankruptcy upon maturity of the existing indebtedness, in which
circumstances the Company's equity holders may experience a loss equal to the
amount of their investment in the Company's Common Stock. In the event the
Company is unable to refinance the indebtedness on terms as favorable as the
terms of the existing indebtedness, the Company is likely to experience a
material and adverse effect on its financial condition and results of
operations.

RELIANCE ON CERTAIN PERSONNEL

        The success of the Company, including its ability to continue to
integrate past acquisitions, depends on the continued services of a relatively
limited number of members of the Company's senior management. The loss of the
services of one or more members of the Company's senior management or the
failure to add qualified management personnel could have a material adverse
effect on the Company's business, financial condition and operating results.

RISKS ASSOCIATED WITH EXPANSION WITHIN EXISTING MARKETS

        The Company seeks to assist the Dental Offices in increasing revenue and
profitability in existing markets by physically expanding the existing Dental
Offices to add more general dentists, specialists and hygienists and by
improving the efficiency of the Dental Offices. The Company's success will be
dependent, in part, upon increasing the revenue from existing Dental Offices.
The Company is subject to risks associated with this growth strategy, including
the risk that the Company will be unable to successfully expand existing Dental
Offices, or increase efficiency through its management of the existing Dental
Offices.


                                       17
<PAGE>

POSSIBLE VOLATILITY OF STOCK PRICE

        The trading price of the Company's Common Stock began a major decline in
1999 triggered by the Company's failure to meet the expectations of securities
analysts and investors for the fourth quarter and year ended December 31, 1998.
This decline led to the Company effecting a one-for-six reverse stock split at
the commencement of trading on June 19, 2001 in order to attempt to maintain the
listing of the Company's Common Stock on the Nasdaq SmallCap Market. At December
31, 2001, the closing price of the Company's Common Stock was $2.27 per share.
The Company cannot provide any assurance that the trading price of the Company's
Common Stock will not experience a further decline.

        In addition, if the Company's lenders foreclose on the Company's assets
or force the Company into bankruptcy upon maturity of the existing indebtedness,
holders of the Company's Common Stock are unlikely to receive any return on
their investment. Moreover, the trading price of the Company's Common Stock
could be subject to additional fluctuations in response to quarter-to-quarter
variations in the Company's operating results, material announcements by the
Company or its competitors, governmental regulatory action, conditions in the
health care industry generally or in the dental services industry specifically,
or other events or factors, many of which are beyond the Company's control.

AVAILABILITY OF DENTISTS

        Dentists practicing at the Dental Offices have entered into employment
agreements individually or through their dental professional corporations and
associations (the "P.C.s") or independent contractor agreements through their
P.C.s. Such agreements typically contain a non-competition agreement for up to
three years following termination of the agreement within a specified geographic
area, usually a specified number of miles from the relevant Dental Office. The
agreements with dentists who have sold their practices to the Company generally
are for a specified initial term of up to five years. Although the Company will
endeavor to renew agreements with affiliated dentists or their professional
corporations, in the event that many of the Company's affiliated dentists
terminate or do not renew their agreements or in the event the non-competition
agreements are determined to be unenforceable or more limited in scope than
their terms, the Company's business, financial condition and operating results
could be materially and adversely affected. The Company has historically
experienced difficulty at times in retaining dentists in some of its markets,
which has adversely affected the Company's financial condition and operating
results. There can be no assurance that the Company will not experience further
difficulty in retaining dentists in the future and that the Company's financial
results will not be adversely affected as a result. In addition, the Company's
growth strategy is dependent on the availability and successful recruitment of
dentists. The Company may not be able to successfully recruit new dentists for
its existing Dental Offices, which may have a material adverse effect on the
Company's business, financial condition and operating results.

RISKS ASSOCIATED WITH COST CONTAINMENT INITIATIVES

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


                                       18
<PAGE>

RISKS ASSOCIATED WITH CAPITATED PAYMENT ARRANGEMENTS

        Part of the Company's growth strategy involves obtaining capitated
managed dental care contracts. Capitated managed dental care contracts are
between dental benefits organizations, the Company and the P.C.s. The Company
negotiates and administers these contracts on behalf of the P.C.s pursuant to
administrative services agreements with the P.C.s (the "Administrative Services
Agreements"). Because the Company assumes responsibility under such
Administrative Services Agreements for all aspects of the operation of the
dental practices (other than the practice of dentistry) and thus bears all costs
of the P.C.s associated with the provision of dental services at the Dental
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Dental Offices under the
capitated managed dental care plans is effectively shifted to the Company. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays a percentage of reasonable charges that are billed by the dental
group practice for the dental services provided.

        There can be no assurance that the Company will be able to negotiate
future capitation arrangements on behalf of itself or the P.C.s, as applicable,
on satisfactory terms or at all, or that the fees offered in current capitation
arrangements will not be reduced to levels unsatisfactory to the Company.
Moreover, to the extent that costs incurred by the Company's affiliated dental
practices in providing services to patients covered by capitated managed dental
care contracts exceed the revenue under such contracts, the Company's business,
financial condition and operating results may be materially and adversely
affected.

GEOGRAPHIC CONCENTRATION

        The geographic concentration of the Company's operations in markets such
as the Dallas-Fort Worth, Houston, Arkansas and Virginia markets increases the
risk to the Company of adverse economic or regulatory developments or action
within these markets. The Company's strategy of focused expansion within
selected markets increases the risk to the Company that adverse economic or
regulatory developments in one or more of these markets may have a material
adverse effect on the Company's business, financial condition and operating
results.

GOVERNMENT REGULATION

        The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
general, regulation of health care-related companies is increasing. In
connection with its operations in existing markets, the Company may become
subject to additional laws, regulations and interpretations or enforcement
actions. The ability of the Company to operate profitably will depend in part
upon the ability of the Company and the P.C.s to operate in compliance with
applicable health care regulations.

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


                                       19
<PAGE>

RISKS ARISING FROM HEALTH CARE REFORM

        There can be no assurance that the laws and regulations of the states in
which the Company operates will not change or be interpreted in the future
either to restrict or adversely affect the Company's relationships with dentists
or the operation of Dental Offices. Federal and state governments periodically
consider various types of health care initiatives and revisions to the health
care and health insurance system. Such initiatives and revisions could, if
adopted, have a material adverse effect on the Company's business, financial
condition and operating results. It is uncertain what legislative programs, if
any, will be adopted in the future, or what actions Congress or state
legislatures may take regarding health care reform proposals or legislation. In
addition, changes in the health care industry, such as the growth of managed
care organizations and provider networks, may result in lower payments for the
services of the Company's affiliated dental practices.

POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY

        In recent years, dentists have become subject to an increasing number of
lawsuits alleging malpractice and related legal theories. Some of these lawsuits
involve large claims and significant defense costs. Any suits involving the
Company or dentists at the Dental Offices, if successful, could result in
substantial damage awards that may exceed the limits of the Company's insurance
coverage.

COMPETITION

        The dental services industry is highly fragmented, consisting primarily
of solo and smaller group practices. The business of providing general dental,
orthodontic and other specialty dental services is highly competitive in the
markets in which the Company operates. The Company believes it competes with
other providers of dental and specialty services on the basis of factors such as
brand name recognition, convenience, cost and the quality and range of services
provided. Competition may include practitioners who have more established
practices and reputations. The Company's affiliated dental practices also
compete in the retention and recruitment of general dentists, specialists and
clinical staff. If the availability of dentists begins to decline in the
Company's markets, it may become more difficult to attract qualified dentists to
staff the Dental Offices sufficiently or to expand them. The Dental Offices may
not be able to compete effectively against other existing practices or against
new single or multi-specialty dental practices that enter its markets, or to
compete against such other practices in the recruitment of qualified dentists.

RISKS ASSOCIATED WITH INTANGIBLE ASSETS

The Company's acquisition of dental practices has resulted in the Company
accumulating a significant level of intangible assets relating to goodwill. In
the event of any sale or liquidation of the Company or a portion of its assets
(including the possible sale of assets to meet amortization requirements under
the Company's Credit Facility), there can be no assurance that the value of the
Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's goodwill may not be recoverable. When factors indicate that the amount
allocable to the Company's goodwill should be evaluated for possible impairment,
the Company may be required to reduce the carrying value of such assets. Based
on such an assessment, the Company was required to write off $3.3 million in
impaired goodwill in the quarter ended December 31, 1998.


                                       20
<PAGE>

        In June 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 prescribes the accounting for intangible assets acquired
individually or with a group of other assets. The amortization of existing
goodwill will cease on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. The
adoption of SFAS No. 142 will result in the Company's discontinuation of
amortization of its goodwill. The Company is currently assessing the impact of
SFAS No. 142 and has not yet determined the full effect this statement will have
on its consolidated financial position or results of operations. However, had
SFAS No. 142 been utilized beginning January 1, 2001, the Company's pre-tax
income would have been increased by $5.6 million, excluding an impairment charge
of $421,000 in connection with a Dental Office closure, which was the
amortization expense charged to earnings under current accounting standards. The
Company will be required to test its goodwill for impairment under the new
standard beginning January 1, 2002. The Company expects to complete its initial
review during the second quarter of 2002. The Company expects to record a
significant impairment charge related to certain of its markets upon completion
of the initial impairment review. All goodwill tests subsequent to January 1,
2002 that result in an impairment to goodwill would have an adverse effect on
the Company's results of operations.

DEPENDENCE ON MANAGEMENT AGREEMENTS, THE P.C.S AND AFFILIATED DENTISTS

        The Company receives fees for services provided to the P.C.s under an
Administrative Services Agreement. The Company typically owns all of the
operating assets of the Dental Offices, but does not employ or contract with
dentists, employ hygienists or control the provision of dental care at the
Dental Offices. The Company's revenue is dependent on the revenue generated by
the P.C.s at the Dental Offices. Therefore, effective and continued performance
of dentists providing services for the P.C.s is essential to the Company's
long-term success. Under each Administrative Services Agreement, the Company
pays substantially all of the operating and nonoperating expenses associated
with the provision of dental services except for the salaries and benefits of
the dentists and hygienists. Any material loss of revenue by the P.C.s would
have a material adverse effect on the Company's business, financial condition
and operating results, and any termination of an Administrative Services
Agreement (which typically is permitted in the event of a bankruptcy or
dissolution or material breach by either the P.C. or the Company, or notice by
the Company) could have such an effect. In the event of a breach of an
Administrative Services Agreement by a P.C., there can be no assurance that the
legal remedies available to the Company will be adequate to compensate the
Company for its damages resulting from such breach. The P.C.s are owned by
dentists who are licensed to practice dentistry in the relevant state. The
Company has entered into a succession agreement with the respective stockholders
of the P.C.s whereby upon termination of such stockholder's affiliation with the
Company by the Company or such stockholder for any reason, the stockholder is
required to sell his or her ownership in the P.C. for a nominal amount to a
licensed dentist designated by the Company.






                                       21
<PAGE>



                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                    <C>
Report of Independent Public Accountants                                                1

Consolidated Balance Sheets as of December 31, 2001 and 2000                            2

Consolidated Statements of Income for the Years Ended                                   3
         December 31, 2001, 2000 and 1999

Consolidated Statements of Stockholders' Equity for the                                 4
         Years Ended December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the Years Ended                               5
         December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements                                              6
</TABLE>




                                       22



<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



TO THE STOCKHOLDERS OF MONARCH DENTAL CORPORATION:

We have audited the accompanying consolidated balance sheets of Monarch Dental
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Monarch Dental Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

The 2001 consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in default with the terms of its Credit
Facility, which expires by its terms on July 1, 2002 and all of the Company's
debt thereunder will then be due. As a result of the default, the Company's
lenders have the right to accelerate the maturity of the Company's debt under
the Credit Facility and to use cash balances in the Company's bank account to
set-off a portion of the debt. The Company does not have cash available, nor
will it generate sufficient cash flow to repay all of its debt under the Credit
Facility, raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The 2001 consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts (including goodwill) or the amount and classification of liabilities
that might result should the Company be unable to continue as a going concern.


                                              ARTHUR ANDERSEN LLP

Dallas, Texas,
March 9, 2002


                                       1
<PAGE>



                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                    -------------------------------
                                                                                                         2001             2000
                                                                                                    -------------     -------------
<S>                                                                                                  <C>               <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents                                                                           $3,811,092        $3,000,013
   Accounts receivable, net of allowances of approximately $10,184,000
        and $12,246,000 in 2001 and 2000, respectively                                                 14,443,921        17,873,979
   Prepaid expenses and other current assets                                                            3,537,678         3,085,466
   Income tax receivable                                                                                  513,416         1,830,335
                                                                                                    -------------     -------------
        Total current assets                                                                           22,306,107        25,789,793
Property and equipment, net of accumulated depreciation of approximately $22,276,000
    and $19,787,000 in 2001 and 2000, respectively                                                     11,712,842        16,949,128
Goodwill, net of accumulated amortization of approximately $19,985,000 and
    $15,527,000 in 2001 and 2000, respectively                                                        114,581,375       128,176,854
Other assets                                                                                              329,721           780,398
                                                                                                    -------------     -------------
       Total assets                                                                                  $148,930,045      $171,696,173
                                                                                                    =============     =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                                    $2,010,146        $4,237,847
   Accrued payroll                                                                                      2,490,966         3,634,797
   Accrued liabilities                                                                                  3,841,014         5,835,219
   Accrued restructuring charges                                                                               --           211,715
   Payable to affiliated dental group practices                                                         4,903,853         4,816,856
   Current maturities of notes payable and capital lease obligations, net of fair value of
      unamortized warrants of approximately $112,000 and $448,000 in 2001 and 2000, respectively       67,578,602         4,439,553
                                                                                                    -------------     -------------
        Total current liabilities                                                                      80,824,581        23,175,987
Deferred income taxes                                                                                   1,854,537         1,113,864
Notes payable, net of fair value of unamortized warrants of approximately $112,000 in 2000                 80,833        76,571,358
Capital lease obligations                                                                                  99,197           395,705
Other liabilities                                                                                       1,851,026         2,450,152
                                                                                                    -------------     -------------
        Total liabilities                                                                              84,710,174       103,707,066
Minority interest in consolidated subsidiaries                                                            459,124           480,770
Commitments and contingencies
Stockholders' equity:
   Preferred Stock, $.01 par value, 2,000,000 shares authorized; no shares issued or outstanding               --                --
   Common Stock, $.01 par value, 50,000,000 shares authorized; 2,166,910 and
     2,150,911 shares issued and outstanding in 2001 and 2000, respectively                                21,669            21,509
   Additional paid-in capital                                                                          67,522,281        67,483,858
   Retained earnings (deficit)                                                                         (3,783,203)            2,970
                                                                                                    -------------     -------------

        Total stockholders' equity                                                                     63,760,747        67,508,337
                                                                                                    -------------     -------------

        Total liabilities and stockholders' equity                                                   $148,930,045      $171,696,173
                                                                                                    =============     =============

</TABLE>


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


                                       2
<PAGE>




                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                           -------------------------------------------------
                                                               2001              2000              1999
                                                           -------------     -------------     -------------
<S>                                                        <C>               <C>               <C>
Patient revenue, net                                       $211,866,820      $211,338,687      $204,069,657
Operating expenses:
   Provider salaries and benefits                            72,932,809        70,483,859        67,089,126
   Clinical and other salaries and benefits                  57,082,991        56,656,344        53,195,318
   Dental supplies                                           10,743,614        10,533,829        10,385,867
   Laboratory fees                                           11,312,208        11,068,194         9,888,105
   Occupancy                                                 10,506,730        10,265,129        10,065,790
   Advertising                                                2,036,516         2,684,003         3,072,988
   Other operating expenses                                  27,622,856        24,692,722        22,031,181
   Strategic alternative costs                                  317,447         2,347,350                --
   Depreciation and amortization                             11,516,456        11,110,359        10,548,650
                                                          -------------     -------------     -------------
                                                            204,071,627       199,841,789       186,277,025
                                                          -------------     -------------     -------------
Operating income                                              7,795,193        11,496,898        17,792,632
Interest expense, net                                        10,187,099        10,526,580         7,687,174
Minority interest in consolidated subsidiaries                  127,340           278,532           224,474
Loss on sale of subsidiary                                    1,067,053                --                --
                                                          -------------     -------------     -------------
Income (loss) before income taxes                            (3,586,299)          691,786         9,880,984
Income taxes                                                    199,874         1,173,612         3,300,363
                                                          -------------     -------------     -------------
Net income (loss)                                           $(3,786,173)        $(481,826)       $6,580,621
                                                          =============     =============     =============
Net income (loss) per common share                               $(1.75)           $(0.22)            $3.16
                                                          =============     =============     =============
Net income (loss) per common share - assuming dilution           $(1.75)           $(0.22)            $3.16
                                                          =============     =============     =============
Weighted average number of common shares
    outstanding                                               2,163,502         2,145,678         2,084,431
                                                          =============     =============     =============
Weighted average number of common and
    common equivalent shares outstanding                      2,163,502         2,145,678         2,085,584
                                                          =============     =============     =============
</TABLE>


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




                                       3
<PAGE>



                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001


<TABLE>
<CAPTION>
                                           COMMON STOCK              COMMON       ADDITIONAL        RETAINED           TOTAL
                                 ----------------------------       STOCK TO        PAID-IN          EARNINGS       STOCKHOLDERS'
                                    SHARES           AMOUNT        BE ISSUED        CAPITAL         (DEFICIT)          EQUITY
                                 ------------    ------------    ------------     ------------    ------------     ------------
<S>                              <C>               <C>          <C>               <C>             <C>              <C>
Balance, December 31, 1998          1,997,042         $19,970    $         --      $63,538,976     $(6,095,825)     $57,463,121
    Net income                             --              --              --               --       6,580,621        6,580,621
    Issuance of Common Stock          123,772           1,238         100,000        2,449,474              --        2,550,712
                                 ------------    ------------    ------------     ------------    ------------     ------------
Balance, December 31, 1999          2,120,814          21,208         100,000       65,988,450         484,796       66,594,454
    Net loss                               --              --              --               --        (481,826)        (481,826)
    Issuance of Common Stock           30,097             301        (100,000)       1,495,408              --        1,395,709
                                 ------------    ------------    ------------     ------------    ------------     ------------
Balance, December 31, 2000          2,150,911          21,509              --       67,483,858           2,970       67,508,337
    Net loss                               --              --              --               --      (3,786,173)      (3,786,173)
    Issuance of Common Stock           15,999             160              --           38,423              --           38,583
                                 ------------    ------------    ------------     ------------    ------------     ------------
Balance, December 31, 2001          2,166,910         $21,669    $         --      $67,522,281     $(3,783,203)     $63,760,747
                                 ============    ============    ============     ============    ============     ============
</TABLE>

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







                                       4
<PAGE>



                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------------------
                                                                                       2001            2000          1999
                                                                                ----------------  -------------   ------------
<S>                                                                                 <C>             <C>            <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income (loss)                                                          $(3,786,173)    $ (481,826)    $ 6,580,621
         Adjustments to reconcile net income (loss) to net cash
                provided by operating activities -
                Depreciation and amortization                                        11,516,456     11,110,359      10,548,650
                Amortization of bank warrants                                           448,141        636,319               -
                Minority interest in consolidated subsidiaries                          127,340        278,532         224,474
                Loss on sale of subsidiary                                            1,067,053              -               -
                Changes in assets and liabilities, net of effects from
                acquisitions -
                        Accounts receivable, net                                      1,555,910       (436,490)     (2,677,201)
                        Prepaid expenses and other current assets                     2,747,017       (139,961)       (529,610)
                        Income tax receivable/payable                                 1,323,876     (1,406,223)        812,620
                        Other noncurrent assets                                      (1,721,541)     1,829,221        (272,128)
                        Accounts payable and accrued expenses                        (1,438,386)      (982,061)     (4,666,972)
                        Accrued restructuring charges                                  (211,715)      (597,260)     (3,547,409)
                        Other liabilities                                              (264,053)        83,167      (3,231,253)
                        Deferred income taxes                                           740,673      1,454,863       1,741,319
                                                                                    -----------     ----------      ----------
                            Net cash provided by operating activities                12,104,598     11,348,640       4,983,111
                                                                                    -----------     ----------      ----------
CASH FLOWS FROM INVESTING ACTIVITIES:

         Purchases of property and equipment, net                                    (2,787,926)    (3,093,971)     (5,100,907)
         Cash paid for dental group practices, including
                related costs, net of cash acquired                                    (591,888)    (5,476,083)     (8,801,908)
         Net proceeds from sale of subsidiary                                         8,957,808              -               -
         Other investing activities                                                           -       (154,189)              -
                                                                                    -----------     ----------      ----------
                            Net cash provided by (used in) investing activities       5,577,994     (8,724,243)    (13,902,815)
                                                                                    -----------     ----------      ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
         Proceeds from notes payable, net of issuance costs                           1,200,000      2,700,000      16,750,000
         Payments for debt issuance costs                                            (1,163,311)      (242,856)     (1,607,615)
         Payments on notes payable, capital lease obligations and other             (16,824,234)    (6,821,559)     (5,252,895)
         Distributions to stockholders/partners                                        (122,551)      (274,843)       (432,797)
         Issuance of Common Stock                                                        38,583        171,559         313,481
                                                                                    -----------     ----------      ----------
                            Net cash provided by (used in) financing activities     (16,871,513)    (4,467,699)      9,770,174
                                                                                    -----------     ----------      ----------


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    811,079     (1,843,302)        850,470

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                          3,000,013      4,843,315       3,992,845
                                                                                     ----------    ----------       ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                              $ 3,811,092    $ 3,000,013     $ 4,843,315
                                                                                   ============    ===========     ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
         Cash paid during the year for interest                                     $ 9,512,760    $ 8,278,392     $ 8,212,850
                                                                                   ============    ===========     ===========
         Cash paid (received) for taxes                                             $(1,893,250)   $ 1,171,964     $   788,010
                                                                                   ============    ===========     ===========
         Cash paid for strategic alternative costs                                  $   515,829    $ 1,533,008               -
                                                                                   ============    ===========     ===========
         Non-cash issuance of Common Stock                                          $         -    $ 1,224,150     $ 2,237,231
                                                                                   ============    ===========     ===========
         Equipment acquired under capital leases                                    $         -    $   193,834               -
                                                                                   ============    ===========     ===========
         Debt assumed through acquisitions                                          $         -    $         -     $   150,000
                                                                                   ============    ===========     ===========
         Non-cash reduction of other liabilities                                    $         -    $         -     $ 3,368,000
                                                                                   ============    ===========     ===========

</TABLE>


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






                                       5
<PAGE>





                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.  DESCRIPTION OF BUSINESS AND CURRENT OPERATING ENVIRONMENT:

        Monarch Dental Corporation, a Delaware corporation, and subsidiaries
(collectively, the "Company"), provide management and administrative services to
dental group practices in selected markets. At December 31, 2001, the Company
provided management and administrative services to 158 dental group practices in
Texas, Colorado, Utah, Arizona, New Mexico, Arkansas, Indiana, Ohio, New Jersey,
Pennsylvania, Virginia, Georgia and Florida (each a "Dental Office" and
collectively, the "Dental Offices.") Although the acquisition activity has
decreased significantly over the last three years due to the limited
availability of additional capital and the Company's focus on improving
operations in its existing Dental Offices, the Company has added 105 Dental
Offices to which it provides management and administrative services since the
end of 1996. Under the terms of the Company's Credit Facility, the Company is
prohibited from making acquisitions without bank approval.

        The Company has a Credit Facility with a bank syndicate, which expires
by its terms on July 1, 2002.

        At December 31, 2001, the Company was in default with the terms of the
Credit Facility under the minimum EBITDA and minimum net worth covenants.
Revenue declines in the Company's Houston, Philadelphia, Georgia, New Jersey and
Colorado markets, which resulted in lower than expected EBITDA levels,
contributed to the defaults. Although the Company is attempting to negotiate an
amendment to its Credit Agreement and to secure a waiver of the defaults and an
extension of the Credit Facility, there can be no assurance that the Company's
lenders will grant a waiver or agree to an amendment on terms acceptable to the
Company or at all. The Company has made all required principal and interest
payments related to its Credit Agreement. However, the Company agreed to make
the monthly principal amounts described above prior to the sale of its Wisconsin
operations. The loss of the cash flow from the Wisconsin operations has
adversely affected the Company's ability to make these payments and avoid a
payment default under the Credit Facility. It is unclear whether the Company's
remaining operations will provide sufficient cash flow to make these payments on
a timely basis.

        On February 7, 2002, the Company's lenders notified the Company that
they were exercising their option to impose the default interest rate under the
Credit Agreement, which is equal to the lead lender's prime rate plus six
percent, for the remaining duration of the Company's default. The default rate
will significantly increase the Company's interest payments under the Credit
Facility and will negatively impact the Company's liquidity. Moreover, for as
long as the Company remains in default, the Company's lenders have the right to
accelerate the maturity of the Company's debt under the Credit Facility and to
use cash balances in the Company's bank accounts to set off a portion of the
debt. The Company does not have cash available to pay off its total indebtedness
under the Credit Facility and its financial condition and results of operations
would be materially and adversely affected by the lenders' use of its available
cash to set off a portion of the debt.

        The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, it is unclear whether the
Company will be able to make its April and May principal payments described
above that were agreed to prior to the sale of its Wisconsin operations due to
the Company's lower monthly cash flow. The Credit Facility expires by its terms
on July 1, 2002, and all of the Company's debt thereunder will then be due. The
Company will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility, raising substantial
doubt about its ability to continue as a going concern. In this regard, the
Company has engaged Bank of America Securities LLC to explore strategic
alternatives such as a sale of the Company, an equity investment in the Company,
the issuance of debt securities or a sale of all or a portion of the Company's
assets. However, there can be no assurance that the Company will be successful
in entering into an agreement to consummate any strategic alternative or that
the Company's lenders will agree to any strategic alternative on terms
acceptable to the Company or at all.

        In the event the Company is unable to refinance this indebtedness its
lenders may foreclose on the Company's assets or force the Company into
bankruptcy, in which circumstances the Company's equity holders may experience a
loss equal to the amount of their investment in the Company's Common Stock. In
the event the Company is unable to refinance the indebtedness on terms as
favorable as the terms of the existing indebtedness, the Company is likely to
experience a material and adverse effect on its financial condition and results
of operations.

        Since the beginning of 1999, as a result of its focus on internal
operations and the limited availability of




                                       6
<PAGE>


additional capital, the Company significantly reduced its acquisition activity.
Under the terms of the Company's Credit Facility, the Company is prohibited from
making acquisitions without bank syndicate approval.

        The 2001 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is in default
with the terms of its Credit Facility, which expires by its terms on July 1,
2002 and all of the Company's debt thereunder will then be due. As a result of
the default, the Company's lenders have the right to accelerate the maturity of
the Company's debt under the Credit Facility and to use cash balances in the
Company's bank account to set-off a portion of the debt. The Company does not
have cash available, nor will it generate sufficient cash flow to repay all of
its debt under the Credit Facility, raising substantial doubt about its ability
to continue as a going concern. The 2001 consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts (including goodwill) or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

2.  SIGNIFICANT ACCOUNTING POLICIES:

    Basis of Presentation / Basis of Consolidation

        The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting. All intercompany accounts and transactions have
been eliminated in the consolidation.

        The Company provides management and administrative services to dental
group practices under long-term administrative services agreements (the
"Administrative Services Agreements"). The Administrative Services Agreements
represent the Company's right to provide these services to the Dental Offices
during the 40-year term of the agreement. The Administrative Services Agreements
cannot be terminated by the related professional dental corporation or
association (the "P.C.'s") without cause, consisting primarily of bankruptcy or
material default. Under the Administrative Services Agreements, the Company
assumes responsibility for providing all management and administrative services
to the dental group practices' business (including all operating expenses
consisting of the expenses incurred by the Company in connection with managing
the Dental Offices, including salaries and benefits for personnel other than
dentists and hygienists, dental supplies, dental laboratory fees, occupancy
costs, equipment leases, management information systems and other expenses
related to the dental practice operations) other than the provision of dental
services and retains a 100% residual interest in the net income of the dental
group practices. The Company receives a management fee equal to the Company's
costs plus the lower of (i) 30% of the P.C.'s net revenues or (ii) the P.C.'s
net pre-tax income. If net pre-tax income exceeds 30% of the P.C.'s net
revenues, the P.C. would retain the amount of pre-tax income over 30% of the
P.C.'s net revenues. The Company's net revenue and operating results are
significantly dependent upon the revenue of the dental group practices. The
Company has no material commitments or guarantees to the dental group practices
under the Administrative Services Agreements.

        Under the Administrative Services Agreements, the Company establishes a
"controlling financial interest" as defined by EITF 97-2, "Application of FASB
No. 94 and APB No. 16 to Physician Practice Management Entities and Certain
Other Entities under Contractual Management Arrangement" ("EITF 97-2"). In
addition, the Company has nominee shareholder arrangements with certain of the
dental group practices as defined by EITF 97-2. For these reasons, the Company
consolidates the financial statements of the dental group practices.

    Patient Revenue, Net

        Patient revenue, net represents the revenue of the Dental Offices
reported at the estimated realizable amounts from third-party payors and
patients for services rendered, net of contractual and other adjustments. In
certain states, dental services are billed and collected by the Company in the
name of the P.C. in accordance with the Management Agreements. Roy D. Smith,
III, D.D.S. is an employee of the Company and sole shareholder of Modern Dental
Professional, P.C. ("Modern Dental"), the professional corporation in Texas
which employs the dentists and other licensed personnel. Patient revenue, net
generated by Modern Dental approximated 37%, 37% and 35%, of total patient
revenue, net in 2001, 2000 and 1999, respectively. No other dental group
practices provided more than 10% of patient revenue, net.


                                       7
<PAGE>



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

        During 2001, 2000 and 1999, the Company estimates that approximately
39.8%, 41.8% and 40.5%, respectively, of patient revenue, net was received under
capitated managed dental care plan agreements with payors. The remainder of
patient revenue, net for these periods was earned under fee-for-service
arrangements. Approximately 10% of the Company's patient revenue, net during
2001, 2000 and 1999 was derived from a contract with Aetna/Prudential Dental
Maintenance Organization, Inc. This contract continues until terminated by
either party upon 60 to 90 days' prior written notice, and the material economic
terms can be renegotiated periodically. The renegotiated terms could have a
positive or adverse effect on the Company's patient revenue, net. Since the
Company is required to provide only basic dental services under these contracts,
there are no significant future losses anticipated under these contracts. There
were no other contracts with payors comprising more than 10% of patient
revenues, net during 2001, 2000 or 1999.

    Advertising

        The costs of advertising, promotion and marketing are expensed in the
year incurred.

    Strategic Alternative Costs

        During 2001 and 2000, the Company incurred strategic alternative costs
resulting primarily from legal, investment banking and other professional fees
from efforts to explore strategic alternatives in order to maximize shareholder
value. These efforts included exploring potential strategic transactions, such
as the possible sale or merger of the Company or a subordinated debt
transaction.

    Cash and Cash Equivalents

        Cash and cash equivalents include money market accounts and all highly
liquid investments with original maturities of three months or less.

    Accounts Receivable

        Accounts receivable represent receivables from patients and other
third-party payors for dental services provided. Such amounts are reported net
of contractual allowances and estimated bad debts. The Dental Offices grant
credit without collateral to their patients, most of whom are local residents
and are insured under third-party payor agreements. Periodically, the Dental
Offices transfer the patient receivables to the Company under the terms of the
Administrative Services Agreements. Amounts collected on behalf of and payable
to the Dental Offices are reflected as payable to affiliated dental group
practices in the accompanying consolidated balance sheets. These amounts are
unsecured and consist primarily of salary and benefits expense of the dental
group practices. Management continually monitors and periodically adjusts its
allowances associated with these receivables based on estimated collection and
payment rates. Any adjustments to these estimates are made in the period that
they become known and quantifiable.

        Included in accounts receivable at December 31, 2001 and 2000 are credit
balances of $4.2 million and $2.7 million, respectively. These amounts represent
prepayments for dental procedures, unallocated payments from patients and third
party payors and refunds due to patients and third party payors that have not
yet been remitted. The Company is currently in the process of quantifying the
total amount that is due to patients and third party payors. At the completion
of this analysis, the Company will likely record a reclassification from
accounts receivable to accounts payable for the amount due to patients and third
party payors.

        Bad debt expense was $5,105,257, $4,779,033 and $4,790,246 for 2001,
2000 and 1999, respectively. During the fourth quarter of 2001, the Company
recorded a $1.0 million charge for uncollectible unbilled orthodontic
receivables. This charge originated due to programming enhancements made to the
Company's clinical management system during the fourth quarter of 2001 that have
enabled the Company to more accurately track its orthodontic contracts.




                                       8
<PAGE>


The Company recognized the $1.0 million charge in the fourth quarter of 2001 as
a change in the accounting estimate when the information became known.

    Property and Equipment

           Property and equipment are stated at cost or fair market value at
dates of acquisition, net of accumulated depreciation. Property and equipment
are depreciated using the straight-line method over the following useful lives:

<TABLE>
<CAPTION>
                                                       YEARS
                                                       -----
<S>                                          <C>
 Leasehold improvements .................     Remaining life of lease
 Furniture and fixtures .................               5-8
 Dental equipment .......................               5-7
 Computer equipment and software.........                5
 Building................................                40
</TABLE>

        Equipment held under capital lease obligations is amortized on a
straight-line basis over the shorter of the lease term or estimated life of the
asset.

        The Company evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance of an asset may not be
recoverable. The assessment of possible impairment is based on whether the
carrying amount of the asset exceeds its fair value. The fair value of impaired
assets is estimated based on quoted market prices, if available, or the expected
total value of the cash flows, on a discounted basis.

        In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses the accounting treatment for the impairment or disposal of
long-lived assets. The impact of this new accounting standard has not yet been
determined.

    Goodwill

        The Company's acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
dental group practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible assets acquired and liabilities
assumed, based on estimated fair market values. Costs of acquisition in excess
of the net estimated fair value of tangible assets acquired and liabilities
assumed are allocated first to identifiable intangibles and the remainder to
goodwill. The Company amortizes goodwill over twenty-five years using the
straight-line method.

        The Company reviews the recorded amount of goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the estimated
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company continually evaluates are unfavorable changes
in each Dental Office's relative market share and local market competitive
environment, current period and forecasted operating results, cash flow levels
of the Dental Offices and the impact on the net revenue earned by the Company,
and legal factors governing the practice of dentistry. In the event of any sale
or liquidation of the Company, or a portion of its assets, there can be no
assurance that the value of the Company's intangible assets will be realized.
The Company did not record any impairment charges in 2001, 2000 or 1999 related
to its existing Dental Offices, however, the Company recorded an impairment
charge of $421,000 in connection with a Dental Office closure in its Dallas-Fort
Worth market in 2001.

           In June 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 prescribes the accounting for intangible assets
acquired individually or with a group of other assets. The amortization of
existing goodwill will cease on



                                       9
<PAGE>


December 31, 2001. Any goodwill resulting from acquisitions completed after June
30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of
testing goodwill for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. The adoption of SFAS No. 142 will
result in the Company's discontinuation of amortization of its goodwill. The
Company is currently assessing the impact of SFAS No. 142 and has not yet
determined the full effect this statement will have on its consolidated
financial position or results of operations. However, had SFAS No. 142 been
utilized beginning January 1, 2001, the Company's pre-tax income would have been
increased by $5.6 million, excluding an impairment charge of $421,000 in
connection with a Dental Office closure, which was the amortization expense
charged to earnings under current accounting standards. The Company will be
required to test its goodwill for impairment under the new standard beginning
January 1, 2002. The Company expects to complete its initial review during the
second quarter of 2002. The Company expects to record a significant impairment
charge related to certain of its markets upon completion of the initial
impairment review. All goodwill tests subsequent to January 1, 2002 that result
in an impairment to goodwill would have an adverse effect on the Company's
results of operations.

    Accrued Restructuring Charges

        Accrued restructuring charges include Dental Office closure costs,
accrued compensation costs for a former officer (see Note 9), litigation
reserves, accrued interest and property taxes. The Company expended the
remaining restructuring amounts during 2001.

    Payable to Affiliated Dental Group Practices

        Payable to affiliated dental group practices includes amounts collected
on behalf of and payable to the Dental Offices. These amounts are unsecured and
consist primarily of salary and benefits expense of the dental group practices.

    Other Liabilities

        Other liabilities consist primarily of estimated liabilities related to
acquisitions accounted for as purchases and deferred rent for the Company's
facilities.

    Use of Estimates

        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 the reported amounts of revenue and expenses during
the reporting period. Areas subject to significant estimate include allowances
on accounts receivable and amortization on goodwill. Actual results could differ
from those estimates.

    Income Taxes

        The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.

    Net Income (Loss) Per Common Share

        The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share has been calculated using the treasury stock method for stock options
and other diluted securities. Such shares totaled 1,153 in 1999. Because the
Company reported a loss in 2001 and 2000, no additional shares related to
dilutive securities have been included for those years since the effect would be
antidilutive. If stock options and other dilutive securities had been included
in the computation of diluted earnings per share, the number of shares would
have increased by 65,731 and 76,281 in 2001 and 2000, respectively.



                                       10
<PAGE>


    Other

        Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to the 2001 presentation.

3.  ACQUISITIONS/DISPOSITIONS:

        On December 31, 2001, the Company sold its Wisconsin operations,
including one office located in Minnesota, to Midwest Dental, Inc., a company
formed by the investment firm of Bayview Capital Partners LP, of Minneapolis,
Minnesota and the Company's former management personnel for the Wisconsin
operations. The Wisconsin operations consisted of Midwest Dental Care, Mondovi,
Inc., Midwest Dental Care, Sheboygan, Inc., Midwest Dental Management, Inc. and
a 79% interest in Midwest Dental Plan, Ltd. The sale price for this transaction
was approximately $9.7 million in cash, of which approximately $9.5 million was
paid at closing and $150,000 was placed in escrow for eighteen-months to satisfy
potential indemnification claims. This transaction is also subject to a
post-closing purchase price adjustment based upon a determination of the actual
working capital of the Wisconsin operations at closing. The Company used
proceeds from the sale to repay indebtedness of approximately $9.3 million under
its existing Credit Facility. Additionally, included in the 2001 consolidated
statement of income, the Company recorded a $1.1 million loss in connection with
the Wisconsin sale, which is not recognized for tax purposes

        Since 1998, the Company's acquisition activity has decreased
significantly due to financing constraints and the Company's focus on improving
operations at its existing Dental Offices. Under the terms of the Company's
Credit Facility, the Company is prohibited from making acquisitions without bank
approval. The Company's current growth strategy is to strengthen the Company's
presence in its existing markets by acquiring dental practices in existing
markets and opening Dental Offices on a de novo basis when opportunities arise
and financial constraints permit. The Company had no acquisitions and did not
open any Dental Offices on a de novo basis in 2001.

        During 2000, the Company acquired 79% of a dental insurance plan in
Wisconsin and acquired certain assets and assumed certain liabilities of one
dental group in Bloomer, Wisconsin for an aggregate purchase consideration of
$751,000 in asset purchase transactions. Subsequently, in 2001 the acquisitions
were sold as part of the Wisconsin operations discussed above.

        All of the acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. Some of these estimates are
preliminary and subject to further adjustment. The estimated fair values of
assets acquired and liabilities assumed during 2001 and 2000 are summarized as
follows:


<TABLE>
<CAPTION>
                                                2001           2000
                                            -----------    -----------
<S>                                         <C>             <C>
Accounts receivable, net ...............    $        --        $28,603
Other assets ...........................             --         (2,858)
Property and equipment, net ............             --         57,138
Liabilities assumed ....................             --      4,216,897
Intangible assets ......................         75,000      1,203,958

Less - Fair value of Common Stock issued             --        (27,655)
                                            -----------    -----------
Cash purchase price (including earnouts)        $75,000     $5,476,083
                                            ===========    ===========
Total earnouts paid ....................       $393,281     $4,725,334
                                            ===========    ===========
</TABLE>




                                       11
<PAGE>



4.  PROPERTY AND EQUIPMENT:

        Property and equipment consists of the following as of December 31:


<TABLE>
<CAPTION>
                                                        2001              2000
                                                    ------------     ------------
<S>                                                 <C>              <C>
Leasehold improvements .........................      $8,363,846       $9,867,710
Furniture and fixtures .........................       4,026,805        4,068,659
Dental equipment ...............................      15,814,765       17,153,460
Computer equipment and software ................       4,865,952        4,728,389
Building .......................................         917,963          917,963
                                                    ------------     ------------
                                                      33,989,331       36,736,181
Less - Accumulated depreciation and amortization     (22,276,489)     (19,787,053)
                                                    ------------     ------------
Property and equipment, net ....................     $11,712,842      $16,949,128
                                                    ============     ============
</TABLE>


        Depreciation expense was $5,482,871, $5,521,359 and $5,232,650 for 2001,
2000 and 1999, respectively.

5.  NOTES PAYABLE:

           Notes payable consists of the following as of December 31:




<TABLE>
<CAPTION>
                                                                             2001            2000
                                                                        ------------     ------------
<S>                                                                      <C>              <C>
Borrowings under credit facility, due July 1, 2002, with an interest
   rate of prime plus 3.0%..........................................     $67,310,800      $79,800,000
Unamortized warrants................................................        (112,035)        (560,176)
Other notes payable, due April 2002, with an interest rate of
   prime plus 0.5%, secured by certain receivables and property ....           3,159           12,759
Notes payable assumed through acquisitions, with interest rates
   ranging between 6.00% and 12.21%, with due dates between January
   2002 and March 2004, secured by certain receivables and
   property ........................................................         383,571        1,542,640
                                                                        ------------     ------------
                                                                          67,585,495       80,795,223
Less - Current maturities ..........................................     (67,504,662)      (4,223,865)
                                                                        ------------     ------------
Notes payable, net .................................................         $80,833      $76,571,358
                                                                        ============     ============
</TABLE>


        The maturities of notes payable at December 31, 2001, are as follows:

<TABLE>
<CAPTION>

<S>                   <C>
2002 .............    $67,504,662
2003 .............         50,833
2004 .............         30,000
2005 .............             --
2006 .............             --
                      -----------
                      $67,585,495
                      ===========

</TABLE>

        The Company has a Credit Facility with a bank syndicate, which expires
by its terms on July 1, 2002. At December 31, 2001, the Company had $67.3
million outstanding under the Credit Facility. Under the original terms, the
amounts outstanding under the Credit Facility bear interest at the lead lender's
prime rate plus three percent with interest payments due on a monthly basis. The
Credit Facility requires the Company to repay principal based on a schedule
whereby monthly payments are made aggregating $2.0 million and $2.3 million in
the first quarter of 2002 and two months ended May 31, 2002, respectively. An
additional principal payment will be required on April 30, 2002 if the Company
exceeds certain cash flow levels. A $500,000 fee is due on April 30, 2002 if a
specified threshold above the required amortization is not met. Additionally,
the lenders will receive warrants to purchase shares of the Company's Common
Stock at an Exercise Price of $0.01 per share (per the Warrant Agreement dated
April 1, 2001), equal to 5% of the outstanding shares of the Company's Common
Stock as of July 1, 2002, if all outstanding debt is not paid in full by July 1,
2002. The Credit Facility prohibits the Company from incurring additional
indebtedness, incurring liens, disposing of assets, making investments or making
acquisitions without bank syndicate approval, and


                                       12
<PAGE>


requires the Company to maintain certain financial covenants. These covenants
require the Company to maintain minimum total net worth of $66.5 million as of
December 31, 2001; minimum EBITDA, on a trailing three month basis, of $6.0
million as of December 31, 2001; and a limit on capital expenditures of $3.0
million from April 1, 2001 through December 31, 2001. All covenants are measured
monthly and minimum thresholds for the minimum total net worth and minimum
EBITDA covenants fluctuate in future periods. The Credit Facility is secured by
all of the assets of the Company.

        As discussed in Note 1, at December 31, 2001, the Company was in default
with the terms of the Credit Facility under the minimum EBITDA and minimum net
worth covenants. Revenue declines in the Company's Houston, Philadelphia,
Georgia, New Jersey and Colorado markets, which resulted in lower than expected
EBITDA levels, contributed to the defaults. Although the Company is attempting
to negotiate an amendment to its Credit Agreement and to secure a waiver of the
defaults and an extension of the Credit Facility, there can be no assurance that
the Company's lenders will agree to an amendment on terms acceptable to the
Company or at all. The Company has made all required principal and interest
payments related to its Credit Agreement. However, the Company agreed to make
the monthly principal amounts described above prior to the sale of its Wisconsin
operations. The loss of the cash flow from the Wisconsin operations has
adversely affected the Company's ability to make these payments and avoid a
payment default under the Credit Facility. It is unclear whether the Company's
remaining operations will provide sufficient cash flow to make these payments on
a timely basis.

        On February 7, 2002, the Company's lenders notified the Company that
they were exercising their option to impose the default interest rate under the
Credit Agreement, which is equal to the lead lender's prime rate plus six
percent, for the remaining duration of the Company's default. The default rate
will significantly increase the Company's interest payments under the Credit
Facility and will negatively impact the Company's liquidity. Moreover, for as
long as the Company remains in default, the Company's lenders have the right to
accelerate the maturity of the Company's debt under the Credit Facility and to
use cash balances in the Company's bank accounts to set off a portion of the
debt. The Company does not have cash available to pay off its total indebtedness
under the Credit Facility and its financial condition and results of operations
would be materially and adversely affected by the lenders' use of its available
cash to set off a portion of the debt.

        The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, it is unclear whether the
Company will be able to make its April and May principal payments described
above that were agreed to prior to the sale of its Wisconsin operations due to
the Company's lower monthly cash flow. The Credit Facility expires by its terms
on July 1, 2002, and all of the Company's debt thereunder will then be due. The
Company will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility, raising substantial
doubt about its ability to continue as a going concern.  In this regard, the
Company has engaged Bank of America Securities LLC to explore strategic
alternatives such as a sale of the Company, an equity investment in the Company,
the issuance of debt securities or a sale of all or a portion of the Company's
assets. However, there can be no assurance that the Company will be successful
in entering into an agreement to consummate any strategic alternative or that
the Company's lenders will agree to any strategic alternative on terms
acceptable to the Company or at all.

        In the event the Company is unable to refinance this indebtedness before
July 1, 2002, its lenders may foreclose on the Company's assets or force the
Company into bankruptcy upon maturity of the existing indebtedness, in which
circumstances the Company's equity holders may experience a loss equal to the
amount of their investment in the Company's Common Stock. In the event the
Company is unable to refinance the indebtedness on terms as favorable as the
terms of the existing indebtedness, the Company is likely to experience a
material and adverse effect on its financial condition and results of
operations.

        In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for certain financial
instruments, including interest rate swap agreements. The Company enters into
interest rate hedging agreements to manage its interest rate exposure. The
Company adopted SFAS No. 133 on January 1, 2001 and its existing interest rate
hedges were designated as cash flow hedges. The effective portion of the gain or
loss on a cash flow hedge must be reported as a component of other comprehensive
income and be reclassified into earnings in the same period or periods during
which the hedged forecasted transaction affects earnings. The ineffective
portion, if any, of the gain or loss on a cash flow hedge must be recognized
currently in earnings. The Company paid $924,000 in connection with its interest
rate hedging agreements during 2001 due to decreases in the prime lending rate
throughout the year. This charge is included in Interest expense, net in the
accompanying consolidated statement of income. The interest rate hedging
agreements expired on December 31, 2001.



                                       13
<PAGE>


6.  STOCKHOLDERS' EQUITY:

        At December 31, 2001, the Company has authorized 52,000,000 shares of
stock, of which (a) 50,000,000 shares, par value $0.01 per share, are designated
Common Stock, and (b) 2,000,000 shares, par value $0.01 per share, are
designated Preferred Stock.

        The Company effectuated a one-for-six reverse stock split at the
commencement of trading on June 19, 2001.

    Stock-Based Compensation

        The Company administers the 1999 Stock Option and Grant Plan (the "1999
Plan") under which 166,666 options to purchase shares of the Company's Common
Stock may be granted to employees, advisors, consultants and other key persons
of the Company and its subsidiaries, including affiliated professional
corporations. Options granted under the 1999 Plan are non-qualified stock
options ("NQSO"). The Company also administers the 1996 Stock Option and
Incentive Plan (the "1996 Plan") under which 229,375 options to purchase shares
of the Company's Common Stock may be granted to officers and other employees,
directors, advisors, consultants and other key persons of the Company and its
subsidiaries. Options granted under the 1996 Plan may be either incentive stock
options ("ISO") or NQSO. The option price per share may not be less than 100% of
the fair market value at the grant date for ISO and may not be less than 85% of
the fair market value at the grant date for NQSO. Generally, options vest over a
4-year period and are exercisable over a ten-year life.

        The following table summarizes the activity during 2001, 2000 and 1999
under the 1999 Plan and 1996 Plan.

<TABLE>
<CAPTION>
                                       2001              2000            1999
                                     --------          --------        --------
<S>                               <C>              <C>              <C>
Outstanding at beginning of year       270,636            236,412         177,812
Granted ........................        83,333             51,542          69,750
Exercised ......................            --                 --              --
Canceled .......................       (91,881)          (17,318)        (11,150)
                                       --------          --------        --------
Outstanding at end of year .....        262,088           270,636         236,412
                                       ========          ========        ========
Exercisable at end of year .....        181,475           152,580          79,926

Price range ....................  $ 1.31-110.25     $ 5.06-110.25   $14.64-110.25
</TABLE>

The following summarizes information about options at December 31, 2001:

<TABLE>
<CAPTION>
                                                  Options Outstanding                             Options Exercisable
                                 ------------------------------------------------------    -----------------------------------
                                                       Weighted           Weighted                               Weighted
       Exercise                                         Average            Average                                Average
        Price                                          Remaining          Exercise                               Exercise
        Range                        Number              Term               Price              Number              Price
-----------------------          ----------------   ----------------   ----------------    ----------------   ----------------
<S>                                   <C>              <C>                <C>                  <C>                <C>
$  1.31-5.06                          91,666           9.2 years          $   3.05                51,666           $  3.15
$  10.13-24.75                        83,664           7.7 years             14.33                56,762             14.72
$  68.25-110.25                       86,758           6.1 years             78.16                73,047             77.83
                                     -------                                                     -------
                                     262,088                                                     181,475
                                     =======                                                     =======

</TABLE>

The shares exercisable at December 31, 2000 and 1999 had a weighted average
exercise price of $51.12 and $62.82 per share, respectively.

The Company accounts for its stock-based compensation arrangements under the
provisions of APB No. 25, "Accounting for Stock Issued to Employees." In 1995,
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued, whereby
companies may elect to account for stock-based compensation using a fair value
based method or continue measuring compensation expense using the intrinsic
value method prescribed in APB No. 25. SFAS No. 123



                                       14
<PAGE>


requires that companies electing to continue to use the intrinsic value method
make pro forma disclosures of net income and net income per share as if the fair
value based method of accounting had been applied.

The Company used the Black-Scholes option-pricing model to estimate the fair
value of options. The effects of applying SFAS No. 123 for 2001, 2000 and 1999
are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                  2001          2000         1999
<S>                                                             <C>          <C>            <C>
Net income (loss):
          As reported                                           $(3,786)      $  (482)       $6,581
          Pro forma                                              (4,754)       (1,507)        5,702

Net income (loss) per common share:
          As reported                                            $(1.75)      $ (0.22)        $3.16
          Pro forma                                               (2.20)        (0.70)         2.74

Net income (loss) per common share - assuming dilution:
          As reported                                            $(1.75)      $ (0.22)        $3.16
          Pro forma                                               (2.20)        (0.70)         2.73
</TABLE>

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                           2001      2000       1999
<S>                                                     <C>        <C>       <C>
Risk-free interest rates .........................         4.84%      6.59%     6.66%
Expected volatility ..............................       113.22%    101.10%    98.77%
Expected weighted average life of options in years         7.0        7.0       7.0
</TABLE>


7.  COMMITMENTS AND CONTINGENCIES:

    Operating and Capital Lease Obligations

        The Company leases all of its facilities, including the Dental Offices
and corporate office, under non-cancelable operating leases, extending through
2011. Rent expense totaled approximately $9.1 million, $8.9 million and $8.6
million for 2001, 2000 and 1999, respectively.

        Future minimum lease commitments under capital and noncancelable
operating leases with remaining terms of one or more years are as follows as of
December 31, 2001:

<TABLE>
<CAPTION>
                                                   OPERATING         CAPITAL
                                                 ------------     ------------
<S>                                             <C>                <C>
2002 ........................................     $ 6,538,431       $   84,439
2003 ........................................       5,170,522           56,376
2004 ........................................       4,168,476           46,327
2005 ........................................       3,023,171            3,861
2006 ........................................       1,666,263               --
Thereafter ..................................       2,061,414               --
                                                  -----------     ------------
   Total minimum lease obligation ...........     $22,628,277          191,003
                                                  ===========
   Less - Amounts representing interest .....                          (17,866)
                                                                  ------------
   Present value of minimum lease obligations                          173,137
   Less - Current maturities ................                          (73,940)
                                                                  ------------
   Capital lease obligations, net ...........                          $99,197
                                                                  ============
</TABLE>




                                       15
<PAGE>



    Litigation, Claims, and Assessments

        The Company is engaged in various legal proceedings incidental to its
business activities. Management does not believe the resolution of such matters
individually or in the aggregate will have a material adverse effect on the
Company's financial position, results of operations or liquidity.


8.  INCOME TAXES:

        The income tax provision (benefit) consisted of the following for the
years ended December 31 (in thousands):

<TABLE>
<CAPTION>
                       2001       2000      1999
                     -------     ------    ------
<S>                  <C>       <C>        <C>
Current:
   Federal           $(542)     $  100     $1,392
   State               500         500        500
                     ------     ------     ------
                       (42)        600      1,892
Deferred               242         574      1,408
                     ------     ------     ------
Total                $ 200      $1,174     $3,300
                     ======     ======     ======
</TABLE>

        Due to the Company's 2001 pre-tax loss, the 2001 effective tax rate is
significantly impacted by non-deductible goodwill amortization, state income
taxes and book over tax basis in the former Wisconsin operations. The Company's
effective tax rate of 169.7% in 2000 is higher than the federal rate of 34.0%
due to non-deductible goodwill amortization and state income taxes. The
Company's effective tax rate of 33.4% in 1999 is lower than the federal rate of
34.0% due to a $2.9 million credit recorded in the fourth quarter related to the
settlement of a dispute with the sellers of an affiliated dental practice that
is not considered taxable income, offset by the impact of state income taxes and
nondeductible goodwill amortization.

        Deferred income taxes are recorded for temporary differences between the
basis of assets and liabilities for financial reporting purposes and income tax
purposes. Temporary differences comprising the deferred tax assets and
liabilities in the consolidated balance sheets as of December 31, 2001 and 2000
are as follows (in thousands):

 <TABLE>
 <CAPTION>
                                                                   2001                    2000
                                                          ---------------------   ---------------------
<S>                                                        <C>        <C>          <C>          <C>
Deferred tax asset:
   Cash to accrual and other ...........................   $2,216                   $2,209
   Fixed asset depreciation ............................      555                       --
                                                           -------                   ------
                                                                        $2,771                    $2,209

Deferred tax liability:
   Deferred tax liabilities of acquired companies           1,839                     1,156
   Intangible asset amortization .......................    2,787                     2,023
   Fixed asset depreciation ............................       --                       144
                                                           ------                   -------
                                                                         4,626                     3,323
                                                                        ------                     -----
   Net deferred tax liability ..........................               $(1,855)                  $(1,114)
                                                                       =======                   =======

</TABLE>


           The deferred income tax provision (benefit) of approximately
$242,000, $574,000 and $1,408,000, in 2001, 2000 and 1999, respectively,
consists primarily of nondeductible accruals, the excess of the tax over book
amortization of intangible assets, the excess of the tax over book depreciation
of fixed assets and cash to accrual adjustments.






                                       16
<PAGE>


9.  RELATED-PARTY TRANSACTIONS:

        The Company leases several of its facilities from affiliated entities.
Total rent expense paid to related parties for 2001, 2000 and 1999 was
approximately $1.2 million, $1.2 million and $1.1 million, respectively. The
leases have average remaining lives of approximately 2.8 years at December 31,
2001.

        The Management Agreement activity between the Company and the Dental
Offices is reflected as a liability in the consolidated balance sheets. Such
amounts are generally payable within a 30-day period following month-end and are
unsecured.

        Included in accrued restructuring charges in 2000 is approximately
$151,000 in compensation expense related to a change in employment status of Dr.
Warren F. Melamed, the Company's founder, who is no longer an employee but
remains as a Director of the Company. This amount was recorded in the fourth
quarter of 1998. Of the total amount accrued, approximately $151,000 and
$384,000 was paid in 2001 and 2000, respectively.


10.  BENEFIT PLANS:

    401(k) Plans

        The Company maintains a defined contribution plan that conforms to IRS
provisions for 401(k) plans. The plan, referred to as the "Monarch 401(k) Plan,"
covers all employees of the Company and the affiliated P.C.'s. Under this plan,
employees are eligible to participate in the plan provided they have attained
the age of 18 and have completed the 90-day initial employment period. The
Company makes discretionary matching contributions up to a maximum dollar
amount. Total contributions by the Company for the plan were approximately $1.2
million, $641,000 and $619,000 for 2001, 2000 and 1999, respectively.

    Employee Stock Purchase Plan

        The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors and approved by the Company's
stockholders. Up to 83,333 shares of Common Stock may be issued under the
Purchase Plan. Offerings under the Purchase Plan commence on each January 1 and
July 1 and have a duration of six months. Generally, all employees who are
customarily employed for more than 20 hours per week as of the first day of the
applicable offering period are eligible to participate in the Purchase Plan.

        During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 167 shares. Unless the employee has previously withdrawn from the offering,
his or her accumulated payroll deductions will be used to purchase Common Stock
on the last business day of the period at a price equal to 85% of the fair
market value of the Common Stock on the first or last day of the offering
period, whichever is lower. The Company issued an aggregate of 16,450 and 18,350
shares of Common Stock under the Purchase Plan in 2001 and 2000, respectively.

11.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

        SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's notes payable and capital lease
obligations are based on similar issues or on current rates available to the
Company and approximate their carrying values at December 31, 2001 and 2000.



                                       17
<PAGE>



12. SEGMENT REPORTING:

        The Company organizes its business into four reportable divisions. The
Company's reportable divisions are strategic business units, and are comprised
of the following:

        Division One - Includes Dallas/Fort Worth, Houston, San Antonio, West
Texas and Virginia Dental Offices.

        Division Two - Includes Georgia, Florida, Colorado and Arizona Dental
Offices.

        Division Three - Includes Indiana, Arkansas, Dayton, Cleveland, New
Jersey, Pittsburgh and Philadelphia Dental Offices.

        Division Four - Includes Wisconsin and Utah Dental Offices. The Company
sold its Wisconsin operations on December 31, 2001.

        The accounting policies of the divisions are the same as those described
in the summary of significant accounting policies except that the Company does
not allocate income taxes to any of the regions.



                                       18
<PAGE>




                      FOR THE YEAR ENDED DECEMBER 31, 2001
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                             Division 1   Division 2   Division 3   Division 4      Total
                             ----------   ----------   ----------   ----------    ---------
<S>                          <C>          <C>          <C>          <C>         <C>
Patient revenue, net          $96,965      $30,680      $49,650      $34,572     $211,867
Total operating expenses       80,854       28,426       43,119       30,257     182,656 (a)
                             --------     --------     --------     --------     --------
Segment contribution           16,111        2,254        6,531        4,315       29,211
Contribution margin                17%           7%          13%          12%          14%
Depreciation and
     amortization expense       4,696        1,605        3,294        1,300       10,895
Interest expense, net              38           51            2           19          110
Segment profit                 11,377          598        3,235        2,996       18,206

Capital expenditures              664          418          400          997        2,479
Total assets                   50,505       20,599       59,246        5,415      135,765
</TABLE>



                      FOR THE YEAR ENDED DECEMBER 31, 2000
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                            Division 1   Division 2   Division 3    Division 4    Total
                            ----------   ----------   ----------    ----------   --------
<S>                         <C>          <C>          <C>          <C>         <C>
Patient revenue, net          $95,572      $32,653      $49,336      $33,778     $211,339
Total operating expenses       76,961       28,762       41,756       28,918      176,397
                             --------     --------     --------     --------     --------
Segment contribution           18,611        3,891        7,580        4,860       34,942
Contribution margin                19%          12%          15%          14%          17%
Depreciation and
     amortization expense       4,451        1,518        3,289        1,230       10,488
Interest expense, net             104           93           54           14          265
Segment profit                 14,056        2,280        4,237        3,616       24,189

Capital expenditures              899          947          542          552        2,940
Total assets                   55,322       21,722       63,102       18,752      158,898
</TABLE>



<TABLE>

Reconciliation of Profit (in thousands)
                                                      2001         2000
                                                    -------      -------
<S>                                                 <C>          <C>
Segment profit                                      $18,206      $24,189
Unallocated amounts:
Corporate operating expenses                          9,582        9,987 (b)
Corporate strategic alternative costs                   317        2,347
Corporate depreciation and amortization expense         622          623
Corporate interest expense, net                      10,077       10,261
Minority interest in consolidated subsidiaries          127          279
Loss on sale of subsidiary                            1,067           --
                                                    -------      -------
Income before income taxes                          $(3,586)        $692
                                                    =======      =======
Corporate capital expenditures                          309          154
Total corporate assets                               12,652       12,798
</TABLE>



(a)     Includes an approximately $1.0 million charge for uncollectible unbilled
        orthodontic receivables (see Note 2).

(b)     Includes approximately $1.0 million in severance payments to a former
        executive of the Company.



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