<PAGE>   1
                                  United States
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
                   For the Fiscal Year Ended December 31, 1997
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                           Commission File No. 0-20222

                     PRINCETON DENTAL MANAGEMENT CORPORATION
             (exact name of registrant as specified in its charter)

                    DELAWARE                       36-3484607
            (State of Incorporation)            (I.R.S. Employer
                                               Identification No.)

             7421 WEST 100TH PLACE, BRIDGEVIEW, ILLINOIS 60455-2442
          (Address of principal executive offices, including zip code)

                                 (708) 974-4000
              (Registrant's telephone number, including area code)

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

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

                         COMMON STOCK, $0.0001 PAR VALUE

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

Check if there is no disclosure  of delinquent  filers in response to Item 405
of  Regulation  S-B  contained  in  this  form,  and  no  disclosure  will  be
contained,  to the best of the Registrant's  knowledge, in definitive proxy or
information  statements  incorporated  by  reference  in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
[X]

The Registrant's revenues for its most recent fiscal year ended December 31,
1997 were $13,795,792.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 1998 (based upon the average bid and ask prices of
these shares in the over-the-counter market as of March 1, 1998) was
approximately $3,469,640.

As of March 1, 1998 there were 2,040,965 shares of the Registrant's Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE


                                       1
<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS.

OVERVIEW

      Princeton Dental Management Corporation ("Princeton" or the "Company") is
involved in the management of dental practices and laboratories. The market of
general dental practitioners and dental specialists is characterized as highly
fragmented. The Company's goal has been to acquire and consolidate dental
practices and to increase their profitability by centralizing certain
administrative, purchasing, marketing and other functions and implementing
certain revenue enhancement programs. Ultimately, the Company's goal has been to
acquire and consolidate a sufficient number of dental practices to justify the
Company's entry into the dental managed care business and possibly the dental
supply business.

      Princeton was incorporated in Delaware in October 1986 and commenced
operations in 1987. Princeton's principal executive offices are located at 7421
West 100th Place, Bridgeview, Illinois 60455-2442.

GENERAL DEVELOPMENT OF BUSINESS.

      Princeton was organized in October 1986 for the purposes of acquiring
dental practices on a nationwide basis and to provide various services to those
dental practices, including marketing, practice development, management, and
support services. From the date of incorporation through April 1992, the Company
developed and provided marketing and practice enhancement services for dental
practices and conducted demographic research.

      As of March 1, 1998, the Company operated nine dental practices and one
dental laboratory, obtained through the acquisitions and sales (the
"Transactions") described below.

      In July 1992, the Company acquired all of the issued and outstanding
shares of common stock of American Dental Health-Battle Creek, P.C. ("Battle
Creek"). Battle Creek operates 3 dental practices in Battle Creek, Taylor and
Ypsilanti, Michigan. The acquisition price, which was a total of approximately
$2,000,000, consisted of $500,000 in cash, $1,000,000 in a promissory note and
$500,000 worth of Company common stock. With respect to the stock, the Company
issued 163,578 shares, which equated to $500,000 in market value of the stock at
the time of acquisition.

      In March 1993, the Company acquired substantially all of the assets of
Century Dental Centers I, P.C. ("Century"), a dental practice located in
Springfield, Pennsylvania. The acquisition price, which was a total of $547,000,
consisted of $145,000 in cash, $269,000 in a promissory note and $133,000 worth
of Company common stock. With respect to the stock, the Company issued 26,394
shares, which equated to $133,000 in market value of the stock at the time of
acquisition.

      Effective as of May 20, 1997, the Company sold the assets comprising the
Century Dental Center to Valley Forge Dental Associates, P.C. The Century Dental
practice, with 1996 revenues of approximately $965,000, represented
approximately 5.3% of the total revenue of the Company. The Century practice was
sold for $590,000. The sales price included $235,000 in cash where a $42,000
commission was paid, $140,000 in contingency payments, a $30,000 note
receivable, and forgiveness of debt and assumption of other liabilities of
approximately $185,000. (See Exhibit 10.59).

      In December 1993 the Company acquired all of the issued and outstanding
common stock of Mason Dental Inc. ("Mason"), a dental laboratory located in
Livonia, Michigan. The acquisition price, which was a total of $3,490,000,
consisted of no cash, $1,629,000 in a promissory note (subsequently adjusted
upwards by $316,406.25 due to a post-closing adjustment based on the value of
the Company's common stock), and $1,861,000 worth of Company common stock. With
respect to the stock, the Company issued 462,500 shares, which equated to
$1,861,000 in market value of the stock at the time of acquisition.


                                       2
<PAGE>   3
      In July, 1997, the original owners of Mason agreed to convert $150,000
worth of debt owed to them by the Company into 53,381 shares of the Company's
Common Stock. (See Exhibits 10.56 and 10.58).

      In February 1994, the Company acquired all of the issued and outstanding
common stock of C.D. Nunnelly, D.D.S. & Associates, Inc., d/b/a Fairfield Dental
Center ("Fairfield"), a dental facility located in Pensacola, Florida. The
acquisition price, which was a total of $1,397,000, consisted of $366,000 in
cash, $541,000 in a promissory note and $490,000 worth of Company common stock.
With respect to the stock, the Company issued 166,667 shares, which equated to
$490,000 in market value of the stock at the time of acquisition.

      In January 1997, the Company sold all of the assets of Fairfield back to
Drs. Payne and Barfield, the individuals from whom the Fairfield practice was
originally purchased (See Exhibit 10.52). The sale price, which was a total of
$935,000, consisted of $475,000 in cash and approximately $460,000 in
forgiveness of debt and assumption of other liabilities.

      In April 1994, the Company acquired all the issued and outstanding stock
of seven dental practices and one dental laboratory, namely The Dental Team of
Boca Raton, Inc., The Dental Team of Boynton Beach, Inc., The Dental Team of
Coral Springs, Inc., The Dental Team of Deerfield Beach, Inc., The Dental Team
of Delray Beach, Inc., The Dental Team of Pompano Beach, Inc., Palm Beach Dental
Services, Inc. and Pompano Square Dental Lab, Inc. (collectively referred to as
"The Dental Team") located in Palm Beach and Broward counties in Southeast
Florida. The acquisition price, which was a total of $4,611,000, consisted of
$600,000 in cash, $831,000 in promissory notes and $3,180,000 worth of Company
common stock. With respect to the stock, the Company issued 1,247,059 shares,
which equated to $3,180,000 in market value of the stock at the time of
acquisition.

      In February 1997, the Company sold all of the assets comprising the Dental
Team of Delray Beach to Dr. Richard Staller, a former director of the Company
and one of the individual dentists from whom the Dental Team was originally
purchased (See Exhibit 10.51). The sale price, which was a total of
approximately $175,000, consisted of approximately $175,000 in forgiveness of
debt and assumption of other liabilities resulting from the acquisition notes
and Dr. Staller's employment and management agreements with the Company. An
additional $25,000 owing pursuant to his management agreement was also forgiven
in connection with this sale.

      Effective  as of June 1, 1997,  the Company  sold the assets  comprising
the Mason Dental Southeast,  Inc. / Renaissance  Dental Studio to Mr. Lawrence
Ceraulo,  individually  and doing business as Certex Dental Studio.  The Mason
Dental  Southeast,  Inc. / Renaissance  Dental  Studio,  with 1996 revenues of
approximately  $390,000,  represented  approximately 2.2% of the total revenue
of the  Company.  (See Exhibit  10.54).  The Mason  Dental  Southeast,  Inc. /
Renaissance  Dental  Studio was sold for  $92,096 in the form of a  short-term
note;  an  additional  short-term  note  payable to  purchase  supplies in the
amount of $9,847; and a assumption of an existing note payable of $18,372.

NARRATIVE DESCRIPTION OF BUSINESS.

      The Company is involved in the management of dental practices and a
laboratory. Dental practices provide routine dental services and, in certain
cases, specialty services such as oral surgery, orthodontics, periodontics, and
endodontics. These services are offered to the general public on either a
fee-for-service basis or through a form of managed care. Dental laboratories
manufacture dental prosthetics (e.g. dentures, bridges, crowns, etc.) as
requested by dental practices.

      The Company's practices compete with both existing neighborhood general
practices as well as franchises and dental practices located in shopping
centers, malls, etc.

      The Company's operations are not significantly dependent on the source or
availability of any materials. Rather, the Company's viability and revenue
production is dependent upon the ability to attract and employ dental
practitioners and specialists. The Company's acquisition strategy typically
includes maintaining the employment of the dentists and specialists within the
acquired practice groups. The Company feels that there is no shortage of
qualified available dental professionals that would impair its ability to
maintain and expand its business.


                                       3
<PAGE>   4
      The Company is not dependent upon any single customer or a few major
customers. However, a significant percentage of the Company's revenues are
generated from managed care agreements. Under customary managed care agreements,
providers agree to accept a reduced fee for service or payment on a capitation
(fixed fee) basis or monthly capitation payments with a plan member paying a
co-pay for certain dental procedures. In return for this concession, under the
terms of such agreements, the practice is a preferred or exclusive provider of
services to a certain population of potential patients. The Company recognizes
that, while these managed care contracts can significantly enhance the revenue
of a given practice, the loss of any of these contracts could likewise be
significant.

      The Company believes that in certain circumstances, the trade name of the
practice or group of practices acquired may have value within the area it
services. As part of each acquisition, the Company always acquires the
practices' trade names and trademarks. The Company typically will not change the
name of the acquired practices post-acquisition.

      The practice of dentistry is subject to regulation under state laws which,
among other things, govern the ownership and control of dental practices,
advertising, fee splitting, referral fees, and other financial arrangements. For
example, some states may require the dentist's name (or possibly a corporate
name of which the practicing dentist is an officer) to be displayed clearly on
an outside sign or on the door of the practice, while other states may require
the billing for professional services to be made by the dentist who rendered the
services with that dentist's name clearly reflected thereon. No regulatory
authority has formally reviewed or approved Princeton's plan of operations and
no such formal review is presently contemplated or, to Princeton's knowledge,
available. No assurances can be given that, if any such review was available or
occurred, the result would be favorable. In addition, there can be no assurance
that such states will not enact more restrictive legislation that could require
Princeton to modify its operations and possibly adversely affect its
profitability prospects.

      As of March 1, 1998, Princeton employed approximately 149 individuals on a
full-time basis, including two executive officers, and 41 on a part-time basis
(defined as less than 32 hours per week). Princeton is not a party to any
collective bargaining agreement and believes its employee relationships are
satisfactory.

ITEM 2. DESCRIPTION OF PROPERTY

      The Company's principal executive offices were moved in 1995 from Holiday,
Florida to Hoffman Estates, Illinois, and in 1996 from the Hoffman Estates
location to 7421 West 100th Place, Bridgeview, IL 60455-2442. The Company
currently leases approximately 2,646 square feet at the Bridgeview location on a
month to month basis at a rate of approximately $1,555.00 per month (plus common
area maintenance and real estate taxes) from an entity controlled by Frank
Leonard Laport, Chairman and CEO of Princeton (See Exhibit 10.49). The Company
also rents its phone system at the Bridgeview location on a month to month basis
at a rate of approximately $570.00 per month from Mr. Laport (See Exhibit
10.50).

      The lease on the former corporate office located at 2739 U.S. Highway 19,
Holiday, Florida 34691, remains Princeton's obligation. Princeton has sublet all
of the space at this location. The net reduction in rent in 1997 due to the
sublease was $114,103. The minimum lease payments under this operating lease,
net of sublease, for the years subsequent to December 31, 1997 are $27,089 in
1998, and $12,313 in 1999.

      On July 31, 1992, in connection with the Battle Creek Acquisition,
Princeton was assigned the right, pursuant to license agreements to operate
dental facilities in Meijers Thrifty Acres stores located in Battle Creek,
Taylor, and Ypsilanti, Michigan. The license agreements, which terminated on
December 31, 1997 also obligated Princeton to make license payments with respect
to the facilities. Pursuant to these licenses, Princeton was required to pay a
base license fee of $28,652 and an additional license fee based upon actual
collections received by each facility. In July, 1997 the company entered into a
Termination Agreement with respect to the Meijer leases, which terminated the
leases and obliged the Company to pay a total of $ 80,000 to Meijer over a
period of twelve months. The Termination Agreement also ended the base license
payments and additional license payments based on actual collections. In April
through June of 1997, the Company entered into new lease and management
agreements for new locations in Ypsilanti, Taylor and Battle Creek. The leases
at each of the Michigan locations


                                       4
<PAGE>   5
are long-term leases, with initial monthly rents ranging from $2,825.00 to
$3,557.41. At the Battle Creek and Ypsilanti locations, the Company also entered
into management agreements with the lead dentist at each location entitling such
dentist to a percentage of net profits generated by such practice in return for
management services.

      On March 31, 1993, in connection with the Century Acquisition, Princeton
was assigned a lease with respect to the facility, which is located in a
shopping center in Springfield, Pennsylvania. The lease, which terminates in
2001 and is subject to renewal, covers approximately 2,820 square feet. For the
year ended December 31, 1997, lease payments on this facility totaled $25,565
including common area maintenance. In connection with the sale of Century,
responsibility for this lease has been transferred to the purchaser.

      On December 31, 1993, in connection with the Mason Acquisition, Princeton
assumed the triple net lease for $148,200 per year, payable on a monthly basis
to Stark Enterprises, an entity owned by three individuals who are now
shareholders of Princeton as a result of the merger and one of whom, Gary A.
Lockwood, is President and COO of Princeton. The lease, which terminates at
December 31, 2001 and is subject to renewal, covers approximately 18,000 square
feet.

      On February 28, 1994, in connection with the Fairfield acquisition,
Princeton assumed a lease for $102,324 per year, payable on a monthly basis to
Fairfield Dental Building, a partnership owned by two individuals who are now
shareholders of Princeton as a result of the merger. The lease, which was due to
terminate at February 28, 1999, covered approximately 7,000 square feet. In
connection with the sale of Fairfield in 1997, this lease has been terminated.

      On April 1, 1994, in connection with the Dental Team acquisition,
Princeton assumed nine facility leases ranging from $7,200 to $68,125 per year,
payable on a monthly basis with expiration dates ranging from April 30, 1998 to
March 1, 2004. The future minimum lease payments under these operating leases
for the years subsequent to December 31, 1997 are $195,587 in 1998, $155,769 in
1999, and $274,867 thereafter. In addition, the Boynton Beach office lease and a
storage facility lease are payable to B & S Properties, a partnership owned by
two individuals who are now shareholders of Princeton as a result of the merger,
which requires monthly payments totaling $3,600 through March 1, 2004. In
connection with the sale of the assets of the Dental Team of Delray Beach, the
lease for the Delray Beach location has been terminated. In connection with the
sale of the Florida dental lab, the purchaser assumed responsibility for that
lease.

       In the opinion of management, the Company's facilities are adequately
covered by insurance.

ITEM 3. LEGAL PROCEEDINGS

      On October 16, 1996, the Company was sued for $160,000 by Romajo Partners
Limited Partnership, a Partnership controlled by Dr. Seymour Kessler, a former
officer and director of the Company. While the Company is appealing, the Company
received an adverse judgment and was required to pay a $162,627.72 judgement
amount and $17,505.90 in legal fees.

      The Company is involved in a number of other legal proceedings related to
malpractice, worker's compensation, general employment, vendor and contract
disputes all in various stages of proceedings. Management believes settlements,
if any, in excess of insurance coverage would be immaterial. There is no other
litigation pending to which Princeton is a party or of which any of its property
is the subject, other than routine litigation incidental to its business and for
which Princeton is insured. Further, there are no proceedings known to be
contemplated by governmental authorities relating to either Princeton or its
properties.

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

      Effective  August 18,  1997,  the  Company  shareholders  approved a 5-1
reverse  stock split of the  Company's  Common  Stock.  All figures  have been
restated to reflect such reverse stock split.
PART II


                                       5
<PAGE>   6

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

      Effective August 18, 1997, the Company shareholders approved a 5-1 reverse
stock split of the Company's Common Stock.

      The Company's common stock and warrants are traded in the over-the-counter
market and have been quoted on the NASDAQ System under the symbols PDMC and
PDMCW, respectively, since April 15, 1992.

      NASDAQ has recently modified its listing criteria for the NASDAQ Small Cap
Market. The Company does not presently meet such new criteria. The Company can
make absolutely no assurances regarding the final outcome of these modifications
to the listing criteria on the NASDAQ System or the impact which such
modifications could have on the Company's continued listing on the NASDAQ
System.

      The following table sets forth the high and low bid quotations for the
Company's common stock and warrants, as reported by the National Association of
Securities Dealers, Inc. for the two most recent fiscal years. Such quotations
reflect inter-dealer quotations, without retail mark-up, markdowns or
commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>
                                  COMMON STOCK             WARRANTS

            FISCAL YEAR ENDED
            DECEMBER 31, 1997         HIGH         LOW       HIGH        LOW
<S>                                  <C>           <C>       <C>         <C>
            First Quarter            $5.00         1.55       .16        .03
            Second Quarter            5.30         2.50       .19        .03
            Third Quarter             4.06         2.35       .09        .03
            Fourth Quarter            3.50         1.78       .13        .03

            FISCAL YEAR ENDED
            DECEMBER 31, 1996

            First Quarter            $8.45         4.70      $N/A       $N/A
            Second Quarter            7.50         3.75       N/A        N/A
            Third Quarter             4.35         2.80       0.06       0.03
            Fourth Quarter            3.75         1.55       0.09       0.03
</TABLE>

   As of December 31, 1997, there were 147 and 35 holders of record of the
Company's common stock and warrants, respectively. These numbers include
shareholders and warrant holders of record who may hold stock and warrants for
the benefits of others. The Company does not consider it practical to attempt to
determine the number of individuals who are beneficial owners of its shares and
warrants.

   Also, as described in detail in Item 12, the Investor Group (as defined in
Item 12) presently holds various Convertible Debt and Warrants which, if
exercised or converted, would result in the Investor Group owning approximately
85% of the issued and outstanding shares of Common Stock of the Company.

   The Company has never paid cash dividends on its common stock and does not
expect to pay such dividends in the foreseeable future. Management currently
intends to retain all available funds for the development of its business and
for use as working capital.



ITEM 6.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS


                                       6
<PAGE>   7
OVERVIEW

      In 1996, the Company continued to incur significant operating losses and
net losses as a result of its overall operations and, in 1996, the Company also
had a one time write down of identifiable goodwill of $3,499,172 to more
properly reflect the value of its practices. During this period the Company made
no significant new acquisitions and incurred significant additional debt,
primarily in the form of convertible debt and preferred stock in connection with
the Financing Arrangement (See Item 12).

       In early 1997, the Company sold three of its existing dental practices
and one of its dental labs (Fairfield, Dental Team at Delray Beach, Century and
Mason Dental Lab Southeast) (See Item 1).

      During 1997, the Company significantly improved operating results which,
when combined with the waiver of interest pursuant to the Modification Agreement
and the Allonge (See Exhibits 10.55, 10.56 and 10.58) the gain from the sale of
three dental offices and one dental lab, an accompanying reduction of the
depreciation and a reduction of the monthly amortization based on the write down
of goodwill at December 31,1996, resulted in a small net profit for 1997.

RESULTS OF OPERATIONS

      Revenue for the year ended December 31, 1997 was $13,795,792 compared with
$18,044,213 for the year ended December 31, 1997, a decrease of $4,248,421. The
change in revenue is due primarily to the sale of three dental practices and one
dental laboratory. Operating expenses decreased $9,244,334 to $13,881,969 for
the year ended December 31, 1997 from $23,126,303 for the year ended December
31, 1997. This decrease is due in large part to the sales of the practices and
dental laboratory and to a one time write down of goodwill during 1996 of
$3,499,172 as well as several cost cutting measures related to compensation,
benefits, and various other practice expenses.

      Interest expense decreased $478,606 to $236,391 for the year ended
December 31, 1997 versus $714,997 incurred in the comparable period last year.
The decrease is primarily from the waiver of interest pursuant to the
Modification Agreement and the Allonge. (See Exhibits 10.55, 10.56 and 10.58)

      The Company showed a net income of $8,419 for the year period ended
December 31, 1997, as compared to a net loss of $5,749,604 for the year period
ended December 3, 1996. Net income for the year ended December 31, 1997 shows
substantial improvement over the prior year ended December 31, 1996, primarily
as a result of significant improvement in operations, the waiver of interest
pursuant to the Modification Agreement and the Allonge (See Exhibits 10.55,
10.56 and 10.58) the gain from the sale of three dental offices and one dental
lab, an accompanying reduction of the depreciation, and a reduction of the
monthly amortization based on the write down of goodwill at December 31, 1996.

FINANCIAL CONDITION

      Changes in the Company's financial condition at December 31, 1997 as
compared with December 31, 1996 resulted primarily from the waiver of interest
pursuant to the Modification Agreement and the Allonge and a general improvement
in operations and the sale of three dental practices and a dental laboratory
during the year ended December 31, 1997. During the year ended December 31,
1997, the Company realized significant proceeds from the sale of Fairfield
Dental, Center Century Dental Center, and Mason Dental Southeast / Renaissance
Dental Studio. The sale of the Dental Team of Delray Beach was exclusively
forgiveness of debt. The Company recognized no cash from the sale of the Delray
Beach practice.

      During 1997, the Company arranged payment terms with several of its
suppliers. Those suppliers have once again begun extending standard credit
terms, and orders are generally no longer shipped being on a C.O.D. basis. One
of the Company's largest suppliers has begun shipping supplies and providing
services based on a mutually agreed upon plan that has been put into place to
reduce the outstanding balances.


                                       7
<PAGE>   8
      The Company is currently in the process of developing revenue enhancement
programs in both the dental practice segment as well as the laboratory segment.
In addition, the Company is also working to improve the operating results of the
various operations by reducing the costs of patient services including the
reduction in payroll. The Company has begun steps to reduce general and
administrative expenses. However, the Company can make no assurances in regards
to the results of these programs.

      In addition, during 1997 the Company sold its dental practice in
Pennsylvanian, two of its Florida dental practices and its dental laboratory in
Florida. These sales are consistent with the Company's long-term business plans
and should generally have a positive impact upon operations.

      During the first and second quarters of 1996, the Company did not deposit
certain state payroll tax liabilities totaling approximately $53,000. The
Company filed the state payroll tax returns for the first and second quarters of
1996 during the first quarter of 1997. Management is currently negotiating with
the State to abate penalties associated with the late payment. These
negotiations are under review by state authorities.

      In the period from 1994 to present, the Company did not make certain
Michigan state tax filings. The Company is in the process of preparing these
filings and estimates its liability at approximately $175,000.

LIQUIDITY AND CAPITAL  RESOURCES  LIQUIDITY AND CAPITAL  LIQUIDITY AND CAPITAL
RESOURCES

      As of December 31, 1997, the Company had a working capital deficit of
$3,777,875 and a financial accumulated deficit of $13,722,771. Goodwill and
other intangibles comprise approximately 67% of total assets, leaving tangible
assets of approximately $2,713,643 and negative tangible net worth of
approximately $4,335,384.

      During the year ended December 31, 1997, the Company's cash and cash
equivalents decreased $138,591. Cash provided by operations was $42,047,
resulting primarily from the Company's decrease in accounts receivable, which
can be attributed to the sale of the dental practices, accounts payable, and
accrued expenses. These operations were partially offset by depreciation and
amortization of $881,845.

      Investing activities provided $645,662 of cash, primarily related to the
sale of the dental practices and laboratory. Cash of $826,300 was used in
financing activities, primarily as a result of the extinguishment of debt.

      As disclosed in Item 12, the Company's primary source of outside financing
is from the Investor Group. Given the Company's working capital deficit and
negative tangible net worth, the Company is heavily reliant on the Investor
Group's financing to continue the Company's expansion plans and to a larger
extent, provide working capital to fund the operations. As indicated above, the
Company had reached agreement with the Investor Group as to a temporary waiver
of interest during 1997. That waiver has expired and interest again began
accumulating as of January 1, 1998.

ITEM 7.  FINANCIAL STATEMENTS

      The Company's audited financial statements for the fiscal years ended
December 31, 1996 and 1997 accompany this report as Item 13.

ITEM 8.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

      None.



PART III


                                       8
<PAGE>   9
ITEM 9.  DIRECTORS AND EXECUTIVE  OFFICERS;  COMPLIANCE  WITH SECTION 16(a) OF
THE EXCHANGE ACT

      The following persons are the directors and executive officers of the
Company as of the date of this report:

<TABLE>
<CAPTION>
                                First Became    Beneficially Owned    Beneficially Owned
Employment              Age      a Director      Number of Shares      Percent of Shares
----------              ---      ----------      ----------------      -----------------
<S>                     <C>     <C>             <C>                   <C>
Frank Leonard Laport     57        8/9/96           98,975(1)               5.0%


George B. Collins        66        8/9/96                0(2)               0.0%

Gary A. Lockwood         51        8/9/96           94,193(3)               4.8%

Dr. Zigmund C. Porter    60       8/15/97                0                  0.0%
</TABLE>


      1)    Does not include full conversion and dilution of Series A Stock and
            Convertible Debt and exercise of the default Warrants currently held
            by Amsterdam Equities Limited and Mr. Laport, (See Item 12),
            Conversion of this Series A Stock and Convertible Debt and exercise
            of the default Warrants could result in Amsterdam Equities and Mr.
            Laport holding, in the aggregate, approximately 85% of the Class. In
            the event of such a conversion and exercise, the 85% of the Class
            would be held almost entirely by Amsterdam Equities with Mr. Laport
            holding less then 8% of the stock resulting from such conversion and
            exercise.

      2)    Does not include Amsterdam Equities Limited stock for which Mr.
            Collins holds a power of attorney.

      3)    Total shares held by the Island Group.

Dr. Richard S. Sokol was elected as a director in August 1997 and resigned in
September 1997.

Frank Leonard Laport. Mr. Laport, born Chicago, Illinois, March 8, 1941,
admitted to the Bar: 1966, Illinois; 1969, Florida; 1974, Indiana; 1966, U.S.
Tax Court; 1967, U.S. District Court, Northern District of Illinois; 1969, U.S.
District, Southern District of Florida; 1974, U.S. District, Southern District
of Indiana; U.S. Supreme Court. Licensed as Illinois Real Estate Broker on July
1, 1964. Earned the Certified Commercial Investment Member (C.C.I.M.)
Designation of the Realtors National Marketing Institute, an affiliate of the
National Association of Realtors in 1983. Education: Elmhurst College (B.S., in
B.A., 1963); DePaul University, Law School (J.D. 1966).

George B. Collins. Mr. Collins, Born Kansas City, Missouri, April 23, 1931;
admitted to bar, 1953, Arkansas; 1955 Illinois; 1970, U.S. Tax Court; 1972, U.S.
Supreme Court; 1982, U.S. District Court, Northern District of Illinois, Trial
Bar; U.S. Court of Appeals, Second, Seventh and Ninth Circuits. Education:
Arkansas A. & M. College (B.S. 1952); University of Arkansas (L.L.B., 1954).
Omicron Delta Kappa. Associate Editor, Arkansas Law Review, 1951-1952. Author:
"Usury," 8 Arkansas Law Review, September 1954. Teaching Associate, Northwestern
University School of Law, 1954-1955. co-author: "Defending White Collar Crimes,"
Practicing Law Institute 1976; "White Collar Crimes; Defense Strategies",
Practicing Law Institute, 1977; "White Collar Crimes:, Practicing Law Institute,
1978; "White Collar Crimes." Practicing Law Institute, 1980. Member: Chicago
(Member, 1955-1978, Vice Chairman, 1967 and Chairman, 1968, Committee on Legal
Education, Member, Committee on Professional Fees, 1966; Vice Chairman, 1973;
1974-1975; Chairman, 1975, Committees on: Environmental Law, 1973; Circuit Court
Operations, 1976. Member 1976-1986, Vice Chairman, 1979-1980; 2981 and chairman
1980-1981, Lawyers Referral Plan Committee), Illinois State, Arkansas and
American Bar Associations.

Gary A. Lockwood. Mr. Lockwood was named Chief Operating Officer of Princeton
Dental Management Corporation in June, 1996. In this capacity, he is responsible
for all of the Company's operating units in Michigan. Previously he served as
Chief Executive Officer of the Company's dental laboratories in Michigan and
Florida. Mr. Lockwood brings to his post more than 20 years of dental management
experience as owner of Michigan-based Mason Dental, Inc. one of the nation's
largest manufacturers of dental prosthetics. Prior to Mason's acquisition by the
Company, he served as President and Director of Diversified Dental Services, a
wholly owned subsidiary of Mason Dental. Mr. Lockwood has held executive
positions and directorships with realty, financial management and banking
organizations. A Michigan native, he is a graduate of Northern Michigan
University with a degree in business administration.


                                       9
<PAGE>   10
Dr. Zigmund C. Porter. Dr. Porter, born Chicago, Illinois, April 20, 1938. Dr.
Porter received his B.S. from the University of Illinois in 1960 and his D.D.S.
from the University of Illinois in 1962. Dr. Porter also received a Certificate
of Periodontics and Oral Medicine from Tufts University School of Dental
Medicine, Boston, in 1962-64. Dr. Porter has been a licensed periodontist for
over 25 years and has held numerous teaching and hospital positions. Including
serving as Professor of Periodontics, University of Illinois, and Director of
Post-Graduate Periodontics from 1964-85, and holding positions at Hinsdale
Hospital, MacNeal Hospital, Illinois Masonic Hospital and the University of
Illinois. Dr. Porter has given numerous lectures and published numerous articles
and texts regarding periodontics and has received a number of citations and
awards for his work in the dental field.

Compliance with Section 16 of the Exchange Act

         Section 16 of the Securities and Exchange Act of 1934 requires the
Company's Directors and Executive Officers, and persons who own more than 10% of
the Company's Common Stock, to file with the Securities and Exchange Commission
(the "SEC") and the NASDAQ System, initial reports of ownership and reports of
changes in ownership of Common Stock. In addition these individuals are also
required by SEC regulations to furnish the Company with copies of all Section 16
forms they file. To the Company's knowledge, during the fiscal year ended
December 31, 1997, all Section 16 filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners were
complied with.





                       [ TABLE TO FOLLOW ON NEXT PAGE ]


                                       10
<PAGE>   11
                       ITEM 10. EXECUTIVE COMPENSATION


      The following table sets forth the compensation accrued by the Company for
the last three fiscal years to the Company's Chief Executive Officers and to
those executive officers whose compensation exceeded $100,000 in any of the last
two fiscal years.


    SUMMARY
 COMPENSATION
     TABLE


<TABLE>
<CAPTION>
                                                          Other Annual     Restricted       Options        LTIP         All Other
Name and Principal Position      Year       Salary ($)    Compensation    Stock Awards      SARS (#)    Payouts (#)    Compensation
---------------------------      ----       ----------    ------------    ------------      --------    -----------    ------------
<S>                              <C>        <C>           <C>             <C>               <C>         <C>            <C>
Kurt E. Anderson                 1997            0              0                0               0           0              0
Former President                 1996            0              0                0               0           0              0
(President 1/95 to 10/95)        1995       53,717              0                0               0           0              0


Charles R. Mitchell              1997            0              0                0               0           0              0
Former President                 1996       44,000              0           10,000(1)            0           0              0
(President 10/95 to 8/96)        1995            0(1)           0                0(1)            0           0              0


Gary A. Lockwood                 1997      119,095(2)           0                0               0           0              0
President and                    1996      117,000(2)           0                0          20,000(2)        0              0
Chief Operating Officer          1995       97,000(2)       3,731(2)             0               0           0              0
(President 8/96 to Present)


Frank Leonard Laport, Esq        1997            0(3)           0(3)             0               0           0              0
CEO & Chairman of the Board      1996            0(3)           0(3)             0               0           0              0
                                 1995            0              0                0               0           0              0
</TABLE>


      (1) Dr. Mitchell was awarded 10,000 shares of Common Stock in connection
      with the execution of his employment contract dated January 1996. Dr.
      Mitchell received no direct compensation in the form of salary or
      consulting fees directly during 1995. However, Stratum Management Inc., a
      company Dr. Mitchell was affiliated with prior to his appointment as
      President, had been paid $35,833 per month in the form of consulting fees
      during 1995 and $41,000 per month during 1996. In addition, Stratum
      received warrants to purchase 120,000 shares (subsequently reduced to
      77,600 shares) of Company common stock at an exercise price of $5.00. Dr.
      Mitchell's wife and siblings remained shareholders and employees of
      Stratum during Dr. Mitchell's tenure with the Company.

      (2) Compensation received was primarily for the management of Dental Labs.
      G. Lockwood did not receive compensation in an executive officer capacity
      during 1995.

      (3) Mr. Laport currently serves without direct compensation. However, Mr.
      Laport is a member of the Investor Group (See Item 12).


                                       11
<PAGE>   12
COMPENSATION OF OUTSIDE DIRECTORS

      Each outside director of the Company receives $1,000 for each meeting
attended, and directors are entitled to be reimbursed for all reasonable
out-of-pocket expenses incurred in connection with their duties as directors.
For the year ended December 31, 1997, outside directors' fees and expenses
amounted to $0.

OPTION GRANTS IN LAST FISCAL YEAR

      As of March 1, 1998 options to purchase an aggregate of 140,000 shares of
Common Stock at exercise prices ranging from $20.00 to $4.35 had been granted
and were outstanding under the Company's 1993 Incentive and Non-Statutory Stock
Option Plan. The dates such options were granted range from June 3, 1993 to June
6, 1996.

      As of March 21, 1996, as amended on July 17, 1996, the Company issued to
each of John H. Hagan and Dr. Seymour Kessler options to purchase 16,200 shares
each (reduced from options to purchase 25,000 shares each originally granted).
The options were exercisable at a price of $5.95 per share, and expire in March
1999.

      In June 1996, the Company issued to Gary A. Lockwood options to purchase
20,000 shares. The options vest over a 3.5 year period. The options were
exercisable at a price of $4.35 per share, and expire in January 2003.

      Effective as of January 1996, as amended on July 17, 1996, the Company
issued Warrants to Purchase up to 77,600 shares of Company common stock (reduced
from 120,000 shares originally) to Stratum Management, Inc., a consulting group
affiliated with Dr. Charles R. Mitchell (See Item 12). The Warrants were
exercisable at an exercise price of $5.00. The Warrants expire in 1998.

      Effective as of April 1996, the Company issued Warrants to purchase to the
Investor Group for an aggregate of 4,125,000 shares of Company common stock
(subject to anti-dilution provision). The Warrants had an exercise price of
$0.10 per share and, due to the failure by the Company to achieve certain stated
financial goals, were exercisable after January 1, 1997 and are presently
exercisable (See Item 12). Effective as of July, 1997 the exercise price of the
warrants were reduced to $0.01 per share (subject to anti-dilution adjustment)
in connection with a year-long interest waiver by the Investors Group. The
Warrants, if exercised, would convert into common stock of the Company equal to
fifty percent (50.0%) of the Company.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

None

EMPLOYMENT AGREEMENTS

      Frank Leonard Laport, Chairman and CEO of the Company, currently serves
without compensation or an employment agreement.

      Effective as of June 1, 1996, the Company entered into an Amendment to
Employment Agreement with Gary A. Lockwood, President and COO of the Company,
which provided for (i) an increase in annual salary, effective as of June 1,
1996, from $97,000 to $105,469.71 (with subsequent annual increases based on the
Consumer Price Index) for Mr. Lockwood's operation of the Company's Mason Dental
subsidiaries, and (ii) a salary of $12,000 per annum and options to purchase up
to 50,000 shares of Company stock for Mr. Lockwood's services as President and
COO of the Company (See Exhibit 10.48).

      Effective as of January 1, 1996, the Company entered into an Employment
Agreement with Dr. Charles R. Mitchell (See Item 12). The Employment Agreement,
which provided for a per annum salary of $96,000 and the outright grant of
10,000 shares of Company common stock, was terminated in all respects


                                       12
<PAGE>   13
effective August 1, 1996 (See Exhibits 10.37 and 10.46).

ITEM 11.  SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership by Certain Beneficial Owners

      The following table sets forth the security ownership by certain
beneficial owners for persons owning 5% or more of the Company's Common Stock as
of March 1, 1998.


<TABLE>
<CAPTION>
   NAME AND ADDRESS OF            AMOUNT AND NATURE         PERCENT
     BENEFICIAL OWNER          OF BENEFICIAL OWNERSHIP      OF CLASS
     ----------------          -----------------------      --------
<S>                            <C>                          <C>
Amsterdam Equities Limited             252,227               12.4%
Norfolk House
Frederick Street, 2nd Floor
Nassau, N.P., Bahamas



Frank Leonard Laport                    98,975                5.0%
7421 W. 100th Place
Bridgeview, IL  60455-2442
Chairman, CEO
-----------------------------------------------------------------
TOTAL                                  351,202               17.4%
</TABLE>


        The security ownership for Amsterdam Equity Limited and Mr. Laport does
not include full conversion and dilution of Series A Stock and Convertible Debt
and exercise of the default Warrants currently held by Amsterdam Equities
Limited and Mr. Laport, (See Item 12). Conversion of this Series A Stock and
Convertible Debt and exercise of the default Warrants could result in Amsterdam
Equities and Mr. Laport holding, in the aggregate, approximately 85% of the
Class. In the event of such a conversion and exercise, the 85% of the Class
would be held almost entirely by Amsterdam Equities with Mr. Laport holding
less then 8% of the stock resulting from such conversion and exercise.


                                       13
<PAGE>   14
SECURITY OWNERSHIP BY MANAGEMENT

      The following table sets forth as of March 1, 1998 the number of shares of
Common Stock of the Company beneficially owned by each named Executive Officer
and Director and by each director and officer as a group. Except as otherwise
indicated all shares are owned directly.


<TABLE>
<CAPTION>
   NAME AND ADDRESS OF            AMOUNT AND NATURE            PERCENT
     BENEFICIAL OWNER          OF BENEFICIAL OWNERSHIP         OF CLASS
     ----------------          -----------------------         --------
<S>                            <C>                             <C>
Frank Leonard Laport                  98,975(1)                  5.0%
7421 W. 100th Place
Bridgeview, IL  60455-2442
Chairman, CEO



Gary A. Lockwood                      94,193(2)                  4.8%
12752 Stark Road
Livonia, MI 48150
Director, President, COO



George B. Collins                       0(3)                       0%
One North LaSalle
Chicago, IL  60602
Director


Dr. Zigmund C. Porter                     0                        0%
3200 N. Lake Shore Drive
Chicago, IL  60657
Director
--------------------------------------------------------------------
All officers as a group           193,168(1)(2)(3)               9.8%
</TABLE>



1)    Does not include full conversion and dilution of Series A Stock and
      Convertible Debt and exercise of the default Warrants currently held by
      Amsterdam Equities Limited and Mr. Laport, (See Item 12), Conversion of
      this Series A Stock and Convertible Debt and exercise of the default
      Warrants could result in Amsterdam Equities and Mr. Laport holding, in the
      aggregate, of approximately 85% of the Class. In the event of such a
      conversion and exercise, the 85% of the Class would be held almost
      entirely by Amsterdam Equities with Mr. Laport holding less then 8% of the
      stock resulting from such conversion and exercise.

2)    Total shares held by the Island Group.

3)    Not included in this number are shares of the class held by Amsterdam
      Equities Limited, which can under certain circumstances, be voted by
      George B. Collins as Amsterdam Equities Limited's Attorney-in-Fact.


                                       14
<PAGE>   15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

FINANCING ARRANGEMENT

      1. On April 22, 1996, the Company entered into a financing arrangement
pursuant to which the Company issued Convertible Debt (the Convertible Debt) to
Amsterdam Equities Limited in the amount of $2,483,620 and 3,599.77 shares of
Series A 11.75% Cumulative Convertible Preferred Stock (the Preferred Stock) to
Amsterdam Equities Limited (195 shares), Frank Leonard Laport (1,904.77 shares),
and Beverly Trust Company, as custodian for the Frank Leonard Laport Rollover
Individual Retirement Account No. 75-49990 (1,500 shares) (collectively, the
Investor Group). The Convertible Debt and Preferred Stock replaced indebtedness
of the Company at April 22, 1996, in the amount of $1,976,700 incurred under
that certain letter agreement dated December 7, 1994 (the Letter Agreement) and
that certain Secured Revolving Demand Note dated January 27, 1995 (the Secured
Note). Under the terms of the Convertible Debt and Preferred Stock Agreements
(also referred to herein collectively as the Financing Arrangement) the Investor
Group may lend additional funds, in increments to be determined solely by the
Investor Group. The Convertible Debt and Preferred Stock were initially to bear
interest and have a coupon rate, respectively of 11.75%, plus the payment of any
withholding taxes which might be due and owing with respect to any person which
is a foreign entity. Payments on the Convertible Debt/Preferred Stock were
interest only due in quarterly installments which were to begin in September
1996. The Convertible Debt/Preferred Stock originally had a maturity of seven
years from the date of closing, subject to acceleration in the event of a
default. Subsequent to September 30, 1996 the Company was unable to pay the
interest only requirements of the Convertible Debt and Preferred Stock
Agreements, therefore, effective October 1, 1996 until the accrued interest is
paid, interest began to accrue at the default rate of 21.75%.

      Pursuant to that certain Modification Agreement ("Modification Agreement")
entered into between the Investor Group and the Company and dated as of July 1,
1997, the Investor Group agreed, conditioned upon continued listing by the
Company on the Nasdaq SmallCap Market and similar concessions by another
significant Company creditor, to waive all accumulated and ongoing interest
and/or dividends on the Convertible Debt/Preferred Stock for the period from
January 1, 1997 through December 31, 1997.

      This waiver on the part of the Investor Group resulted in a total savings
to the Company in excess of $700,000.

      In addition to the amounts owed under the Letter Agreement and the Secured
Note, the terms of the Convertible Debt and Preferred Stock Agreements called
for the conversion of 58,333 shares of the Company's Regulation D stock held by
the Investor Group into $350,000 of Convertible Debt and Preferred Stock. The
shares of common stock were being held in treasury at time of redemption.

      An additional provision of the Convertible Debt and Preferred Stock
Agreements included the payment of $300,000 as a closing fee and required the
Company to reimburse the legal fees and costs and expenses of the Investor Group
in connection with the negotiation and the closing of the transaction which
totaled $216,897. The closing fees and reimbursement of the costs and expenses
were payable in the form of Convertible Debt and Preferred Stock. In total, the
Company incurred costs of $544,716 in connection with the refinancing which has
been capitalized and will be amortized over a period of seven years or until the
Convertible Debt/Preferred Stock is called.

      The terms of the Convertible Debt and Preferred Stock Agreements provided
the Investor Group with certain rights pertaining to the registration of any
common stock to which the Investor Group may convert from Convertible Debt or
Preferred Stock, certain anti-dilution rights, and a right of first refusal on
any future offering of Company securities.

      Under the terms of the transaction, the Company also issued a warrant to
purchase 100 shares of Series B Preferred Stock. The Series B Preferred Stock
entitled Amsterdam Equities Limited, after the occurrence of an


                                       15
<PAGE>   16
event of default, to elect a Class B director who would have super-majority
voting powers on the Company's Board of Directors.

         The Convertible Debt and Preferred Stock may be converted into the
common stock of the Company, at the sole option of the Investor Group, at
various conversion rates as set forth in the conversion formula contained in the
Convertible Debt and Preferred Stock Agreements. Conversion pursuant to such
conversion formula would result in a conversion price per share of the Company's
common stock below present market levels. If the Investor Group were to convert
all outstanding Convertible Debt and Preferred Stock at the present time, and
exercise the default warrants discussed below, the conversion would result in
the issuance to the Investor Group of a majority interest representing
approximately eighty-five percent (85.0%) of the issued and outstanding shares
of the Company's common stock (assuming full conversion and anti-dilution). In
the event of such a conversion and exercise, the 85% of the Class would be held
almost entirely by Amsterdam Equities with Mr. Laport holding less then 8% of
the stock resulting from such conversion and exercise.

         In addition, pursuant to the terms of the Financing Arrangement, the
Company issued to the holders of the Convertible Debt and the Preferred Stock a
series of default warrants to purchase an aggregate number of shares of common
stock equivalent to fifty percent (50.0%) of the issued and outstanding Common
Stock of the Company at an exercise price of $0.50 per share (subject to
anti-dilution adjustment per terms). The Investor Group could exercise the
warrants only upon the occurrence of an event of default under the terms of the
Financing Arrangement or upon the failure by the Company to achieve certain
minimum financial goals of net income of at least one dollar in the fiscal year
ending December 31, 1996, and various net income tests in subsequent years. The
Company has been in ongoing default under the Financing Arrangement and the
stated financial goals have not been met, and, accordingly, these default
warrants have been capable of being exercised by the Investor Group upon payment
of a minimal exercise price since January 1, 1997. The cumulative effect of the
issuance of shares pursuant to the default warrants to the Investor Group and
the conversion of outstanding Convertible Debt/Preferred Stock could result in
ownership by the Investor Group of approximately 85% of the Company's total
issued and outstanding common stock. In the event of such a conversion and
exercise, the 85% of the Class would be held almost entirely by Amsterdam
Equities with Mr. Laport holding less then 8% of the stock resulting from such
conversion and exercise. To date, while the Company could potentially cure these
defaults, the Investor Group has taken no steps to exercise these default
warrants.

      Pursuant to the Modification Agreement, and as an absolute pre-condition
to the waiver by the Investor Group of all accumulated and ongoing interest
and/or dividends on the Convertible Debt/Preferred Stock for the period from
January 1, 1997 through December 31, 1997 the Company agreed to reduce the
exercise price of the default warrants from $0.50 per share to $0.01 per share
(subject to anti-dilution adjustment) effective as of July 1, 1997. This
modification effectively reduces the aggregate exercise price of approximately
$412,500 for the default warrants to an aggregate exercise price of
approximately $41,250 (not accounting for any adjustments due to the
anti-dilution provision of the Warrants and due to changes in the total issued
and outstanding shares of the Company's common stock).

      2. In August 1996, the Company entered into a Letter Agreement by and
among the Company; Dr. Charles R. Mitchell, a former President of the Company;
Stratum Management, Inc., a former consultant to the Company; John H. Hagan, a
former director of the Company; Dr. Seymour Kessler, a former director of the
Company; and Amsterdam Equities Limited, Frank Leonard Laport, and Beverly Trust
Company, as Custodian of the Frank Leonard Laport Rollover Individual Retirement
Account No. 75-49990, each members of the Investor Group. Under the Letter
Agreement, which became effective on August 9, 1996, the Series B Preferred
Stock previously referred to in the Convertible Debt Agreement executed by the
Company on April 22, 1996 was amended to be immediately effective and Class B
Preferred Stock was immediately issued to Amsterdam.

      The Class B Preferred Stock entitled Amsterdam to elect a Director to the
Board of Directors of the Company who would have super majority voting powers.
In effect, the Class B director appointed by Amsterdam shall have the number of
votes on the Board of Directors as the current Board currently holds, plus one
vote. The


                                       16
<PAGE>   17
amendment and activation of the Class B Preferred Stock occurred upon the
satisfaction of the following two conditions: (i) delivery to the Company of a
notice, pursuant to which the Investor Group would convert an aggregate amount
of U.S. $700,000 of currently outstanding Convertible Debt/Preferred Stock into
the Company's Common Stock in accordance with the contractual terms of the
Convertible Debt and Preferred Stock Agreements executed on April 22, 1996 and
(ii) upon the advance to the Company of an additional $200,000.00 pursuant to
the Convertible Debt and the Preferred Stock Agreements executed April 22, 1996.
As of August 9, 1996, the Investor Group had satisfied these two conditions and
the Class B Preferred Stock was issued to Amsterdam.

      Frank Leonard Laport, Chairman and CEO of the Company, was elected as the
Series B Director effective as of August 9, 1996. The Series B Director has not
voted on any matters to date or taken any action whatsoever to date.

      In connection with the activation of the Class B Preferred Stock, the
provision of additional funding and conversion of debt, Stratum, Hagan and
Kessler agreed to forfeit, on a pro rata basis, an aggregate amount of 60,000
options/warrants to purchase the Company's Common Stock of the Company.

Note 4 - CONVERSION OF DEBT

      Pursuant to the Allonge and Fifth Amendment to Acquisition Promissory Note
dated as of July 1, 1997, the Company, Mason Dental Midwest, Inc. and the
Constituent Shareholders of the Delaware corporation formally known as Mason
Dental, Inc., agreed to convert $150,000.00 worth of the outstanding debt held
by the Constituent Shareholders into 53,381 share of the company's common stock
which was previously held as treasury stock.

MISCELLANEOUS

      On October 16, 1996, the Company was sued for $160,000 by Romajo Partners
Limited Partnership, a partnership controlled by Dr. Seymour Kessler, a former
officer and director of the Company. While the Company is appealing, the Company
received an adverse judgment and was required to pay a $162,627.72 judgement
amount and $17,505.90 in legal fees.

      In December 1996, the Dickerson Investment Group, Inc., a company
affiliated with a shareholder of the Company, loaned the Company $175,000 in
order to meet certain operating expenses. The amount currently owed is
approximately $72,000 (See Exhibit 10.53).

PART IV

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(Pages are not sequentially numbered)

(a)(1) Financial Statements:

      Report of Independent Certified Public Accountants
      Consolidated Balance Sheets as of December 31, 1997 and 1996
      Consolidated Statements of Operations for the years ended December 31,
        1997 and 1996
      Consolidated Statements of Shareholders' Equity for the years ended
        December 31, 1997 and 1996
      Consolidated Statements of Cash Flows for the years ended December 31,
        1997 and 1996
      Notes to Consolidated Financial Statements


                                       17
<PAGE>   18
(a)(2) Exhibits:

The following documents are filed as exhibits to this Report:

2.1  Agreement and Plan of Reorganization between the Registrant and Dental
Laser Center of the Palm Beaches, Inc., The Dental Team of Boca Raton, Inc., The
Dental Team of Boynton Beach, Inc., The Dental Team of Coral Springs, Inc., The
Dental Team of Deerfield Beach, Inc., The Dental Team of Delray Beach, Inc., The
Dental Team of Pompano Beach, Inc., Palm Beach Dental Service, Inc., PBD Supply,
Inc., and Pompano Square Dental Lab, Inc. (incorporated by reference to Exhibit
2. 1 to the Registrant's Form 1O-KSB for the fiscal year ended December 31, 1993
(Registration Number 33-43298-A) filed with the Commission on April 14, 1994).

2.2  Share Acquisition and Merger Agreement between Registrant and C.D.
Nunnelley, D.D.S. & Associates (incorporated by reference to the Exhibit to the
Company's Form 8-K filed with the Commission on March 15, 1994).

2.3  Agreement and Plan of Reorganization between the Registrant and Mason
Dental, Inc. (incorporated by reference to the Exhibit to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-69406) filed with the
Commission on September 27, 1993).

3.1  Restated Certificate of Incorporation of the Registrant, as restated
through August 19, 1991 (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-18 (Registration No. 33-43298-A)
filed with the Commission on October 10, 1991).

3.2  Amendments to the Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Registrant's
Registration Statement on Form S-18 (Registration No. 33-43298-A) filed with the
Commission on April 10, 1992).

3.3  Bylaws of the Registrant, as amended and restated December 1, 1992
(incorporated by reference to Exhibit 3.2 or the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission of
February 1, 1993).

4.2  Warrant Agreement between the Registrant and the Warrant Agent
(incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

4.3  Letter Amendment to Warrant Agreement between the Registrant and the
Warrant Agent (incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form SB-2 (Registration No. 33-57698) filed with the
Commission on February 1, 1993).

9.1  Voting Trust Agreement between the Registrant and Jerry I. Bratman, D.D.S.,
Judith K. Bratman, Theodore M. Strauss, D.D.S., Madelyn Strauss, and Richard J.
Staller, D.D.S. (incorporated by reference to Exhibit 9. 1 to the Registrant's
Form 10-KSB for the fiscal year ended December 31, 1993 (Registration Number
33-43298-A) filed with the Commission on April 14, 1994.)

10.1 Registrant's Stock Option Plan, as amended (incorporated by reference to
the exhibit of the same number to the Registration Statement on Form SB-2
(Registration No. 33-57698) filed with the Commission on February 1, 1993).

10.2 Letter Agreement dated December 7, 1994 between an investment group and the
Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-QSB/A (Amendment No. 1) (Registration No. 33-43298-


                                       18
<PAGE>   19
A) filed with the Commission on December 20, 1994).

10.2/A Amendment to Letter Agreement dated April 10, 1995 between an investment
group and the Registrant (incorporated by reference to the Exhibit to the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1994
(Registration Number 33-43298-A) filed with the Commission on April 14, 1995)

10.3  $300,000 Line of Credit Agreement with First American Bank-Northeast
Illinois, as amended (incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-18 (Registration No. 33-43298-A)
filed with the Commission on October 10, 1991).

10.3/A Modification Agreement and Installment Note dated February 3, 1995
between First of America Bank-Illinois, N.A. and the Registrant (incorporated by
reference to the Exhibit to the Registrant's Form 10-KSB for the fiscal year
ended December 31, 1994 (Registration Number 33-43298-A) filed with the
Commission on April 14, 1995.)

10.4  Secured Revolving Demand Note dated January 27, 1995 between an investment
group and the Registrant (incorporated by reference to the Exhibit to the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1994
(Registration Number 33-43298-A) filed with the Commission on April 14, 1995.)

10.4/A Allonge and Amendment to Secured Revolving Demand Note dated March 9,
1995 between an investment group and the Registrant (incorporated by reference
to the Exhibit to the Registrant's Form 10-KSB for the fiscal year ended
December 31, 1994 (Registration Number 33-43298-A) filed with the Commission on
April 14, 1995.)

10.5  Share Purchase Agreement between Princeton Management and Glenn C. Lehr,
D.D.S. (incorporated by reference to the Exhibit to Registrant's Form 8-K filed
with the Commission on October 13, 1992).

10.6  Balloon Promissory Note Payable to Glenn C. Lehr, D.D.S. (incorporated by
reference to the Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

10.7  Installment Promissory Note Payable to Glenn C. Lehr, D.D.S (incorporated
by reference to the Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

10.8  Stock Pledge and Escrow Agreement between Princeton Management and Glenn
C. Lehr incorporated by reference to the Exhibit of the same number to the
Registrant's Registration Statement on Form SB-2 (Registration No. 33-57698)
filed with the Commission on February 1, 1993).

10.9  Sublicense Agreement and Consent between Princeton Management and Amdent,
P.C. (Battle Creek, MI) (incorporated by reference to the Exhibit of the same
number to the Registrant's Registration Statement on Form SB-2 (Registration No.
33-57698) filed with the Commission on February 1, 1993).

10.10 Sublicense Agreement and Consent between Princeton Management and Amdent,
P.C. (Taylor, MI) (incorporated by reference to the Exhibit of the same number
to the Registrant's Registration Statement on Form SB-2 (Registration No.
33-57698) filed with the Commission on February 1, 1993).

10.11 Sublicense Agreement an Consent between Princeton Management and Amdent,
P.C. (Ypsilanti, MI) (incorporated by reference to the Exhibit of the same
number to the Registrant's Registration Statement on Form


                                       19
<PAGE>   20
SB-2 (Registration No. 33-57698) filed with the Commission on February 1, 1993).

10.12 Management Agreement between Princeton Dental Management Corporation and
Amdent P.C. (incorporated by reference to the Exhibit of the same number to the
Registrant's Registration Statement on Form SB-2 (Registration No. 33-57698)
filed with the Commission on February 1, 1993).

10.13 Dental Equipment Lease between Princeton Management and Amdent, P.C.
(Ypsilanti, MI) (incorporated by reference to the Exhibit of the same number to
the Registrant's Registration Statement on Form SB-2 (Registration No. 33-57698)
filed with the Commission on February 1, 1993).

10.14 Dental Equipment Lease between Princeton Management and Amdent, P.C.
(Taylor, MI) (incorporated by reference to the Exhibit of the same number to the
Registrant's Registration Statement on Form SB-2 (Registration No. 33-57698)
filed with the Commission on February 1, 1993).

10.15 Dental Equipment Lease between Princeton Management and Amdent, P.C.
(Battle Creek, MI) incorporated by reference to the Exhibit of the same number
to the Registrant's Registration Statement on Form SB-2 (Registration No.
33-57698) filed with the Commission on February 1, 1993).

10.16 Facilities Management Agreement between Princeton Management and Glenn C.
Lehr, D.D.S. incorporated by reference to the Exhibit of the same number to the
Registrant's Registration Statement on Form SB-2 (Registration No. 33-57698)
filed with the Commission on February 1, 1993).

10.17 Management Agreement and Stock Pledge and Escrow Agreement between
Princeton Management, Glenn C. Lehr, D.D.S., and Lebow and Tobin (incorporated
by reference to the Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

10.18 Assignment and Consent Agreement (Ypsilanti, MI) (incorporated by
reference to the Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

10.19 Assignment and Consent Agreement (Taylor, Ml) (incorporated by reference
to the Exhibit of the same number to the Registrants Registration Statement on
Form SB-2 (Registration No. 33-57698) filed with the Commission on February 1,
1993).

10.20 Assignment and Consent Agreement (Battle Creek, Ml) (incorporated by
reference to the Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-57698) filed with the Commission on
February 1, 1993).

10.21 Asset Purchase Agreement between Princeton Management Northeast and
Century Dental Center 1, P.C. (incorporated by reference to the Exhibit to the
Company's Form 8-K, as filed with the Commission on April 15, 1993).

10.22 The Company's 1993 Incentive and Non-Statutory Stock Option Plan
(incorporated by reference to the Exhibit of the same number to the Registrant's
Registration Statement on Form SB-2 (Registration No. 33-57698) filed with the
Commission on June 18, 1993).

10.23 Installment Promissory Note payable to Mason Dental, Inc. shareholders
(incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-KSB for
the fiscal year ended December 31, 1993 (Registration Number


                                       20
<PAGE>   21
33-43298-A) filed with the Commission on April 14, 1994).

10.24 Allonge and Amendment to Acquisition Promissory Note dated April 10, 1995
between Mason Dental, Inc. and the Registrant (incorporated by reference to the
Exhibit to the Registrant's Form 10-KSB for the fiscal year ended December 31,
1994 (Registration Number 33-43298-A) filed with the Commission on April 14,
1995.)

10.25 Shareholder Agreement between the Registrant and Mason Dental, Inc.
Affiliate Shareholders (incorporated by reference to Exhibit 10.31 to the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1993
(Registration Number 33-43298-A) filed with the Commission on April 14, 1994).

10.26 Security Agreement between Princeton Medical Management Southeast, Inc.
and Clement W. Barfield, D.D.S., and Philip A. Payne, D.D.S. (incorporated by
reference to Exhibit 10.32 the Registrant's Form 10-KSB for the fiscal year
ended December 31, 1993 (Registration Number 33-43298-A) filed with the
Commission on April 14, 1994).

10.27 Security Agreement between Princeton Medical Management Southeast, Inc.
and Jerry I. Bratman, D.D.S., Theodore M. Strauss, D.D.S., and Richard J.
Staller, D.D.S. (incorporated by reference to Exhibit 10.33 to the Registrant's
Form 10-KSB for the fiscal year ended December 3l, 1993 (Registration Number
33-43298-A) filed with the Commission on April 14, 1994).

10.28 Installment Promissory Notes payable to The Dental Team Shareholders
(incorporated by reference to Exhibit 10.34 to the Registrant's Form 10-KSB for
the fiscal year ended December 31, 1993 (Registration Number 33-43298-A) filed
with the Commission on April 14, 1994).

10.28/A Binding letter of agreement dated February 6, 1995 between The Dental
Team Shareholders and the Registrant (incorporated by reference to the Exhibit
to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1995
(Registration Number 33-43299-A) filed with the Commission on April 14, 1995).

10.29 Settlement Agreement and Release between A.S. Goldmen & Co., Inc.
Shoenberg & Hieber, Inc. and the Company, dated April 10, 1995 and effective May
12, 1995 (incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-QSB for the quarterly period ended March 31, 1995 (Registration No. 0.20222)
filed with the Commission of May 15, 1995.

10.30 Allonge and Amendment to Secured Revolving Demand Note, dated April 15,
1995, between the Investment Group and the Registrant (incorporated by reference
to Exhibit 10.2 to the Registrant's Form 10-QSB/A for the quarterly period ended
March 31, 1995 (Registration No. 0-20222) filed with the Commission on May 30,
1995).

10.31 Amendment to Letter Agreement, dated May 22, 1995, between the Investor
Group and the Registrant (incorporated by reference to Exhibit 10.3 to the
Registrant's Form 10-QSB/A for the quarterly period ended March 31, 1995
(Registration No. 0-20222) filed with the Commission on May 30, 1995).

10.32 Allonge and Amendment to Secured Revolving Demand Note, dated June 23,
1995, between the Investor Group and the Registrant (incorporated by reference
to Exhibit 10.4 to the Registrant's Form 10-QSB for the quarterly period ended
March 31, 1996 (Registration No. 0-20222) filed with the Commission on June 12,
1996).

10.33 Allonge and Amendment to Secured Revolving Demand Note, dated August 24,
1995, between the Investor Group and the Registrant (incorporated by reference
to Exhibit 10.6 to the Registrant's Form 10-QSB for the quarterly period ended
March 31, 1996 (Registration No. 0-20222) filed with the Commission on


                                       21
<PAGE>   22
June 12, 1996).

10.34 Amendment to Letter Agreement, dated August 24, 1995, between the Investor
Group and the Registrant (incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-QSB for the quarterly period ended March 31, 1996
(Registration No. 0-20222) filed with the Commission on June 12, 1996).

10.35 Allonge and Amendment to Secured Revolving Demand Note, dated September 8,
1995, between the Investor Group and the Registrant (incorporated by reference
to Exhibit 10.8 to the Registrant's Form 10-QSB for the quarterly period ended
March 31, 1996 (Registration No. 0-20222) filed with the Commission on June 12,
1996).

10.36 Amendment to Letter Agreement, dated September 8, 1995, between the
Investor Group and the Registrant (incorporated by reference to Exhibit 10.9 to
the Registrant's Form 10-QSB for the quarterly period ended March 31, 1996
(Registration No. 0-20222) filed with the Commission on June 12, 1996).

10.37 Employment Agreement by and between the Company and Dr. Charles R.
Mitchell, D.D.S. dated March 1996, with an effective date of January 1, 1996
(incorporated by reference to the exhibit to the Registrant's Form 10-QSB filed
with the Commission on September 23, 1996).

10.38 Consulting Agreement by and between the Company and Stratum Management,
Inc. dated January 1, 1996 (incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on September 23, 1996).

10.39 Amendment to the Warrant Agreement by and between the Company and Stratum
Management, Inc., dated July 17, 1996 (incorporated by reference to the exhibit
to the Registrant's Form 10-QSB filed with the Commission on September 23,
1996).

10.40 Non-Statutory Stock option agreement by and between the Company and John
H. Hagan, dated March 21, 1996 (incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on September 23, 1996).

10.41 Amendment to the Non-Statutory Stock Option Agreement by and between the
Company and John H. Hagan dated July 17, 1996 (incorporated by reference to the
exhibit to the Registrant's Form 10-QSB filed with the Commission on September
23, 1996).

10.42 Non-Statutory Stock Option Agreement by and between the Company and Dr.
Seymour Kessler dated March 21, 1996 (incorporated by reference to the exhibit
to the Registrant's Form 10-QSB filed with the Commission on September 23,
1996).

10.43 Amendment to the Non-Statutory Stock Option Agreement dated July 17, 1996,
by and between the Company and Dr. Seymour Kessler (incorporated by reference to
the exhibit to the Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).

10.44 Series A 11.75% Cumulative Convertible Preferred Stock Purchase Agreement
by and between Frank Leonard Laport, Beverly Trust Company, as Custodian of the
Frank Leonard Laport Rollover Individual Retirement Account Number 75-49990, and
Amsterdam Equities Limited, dated April 22, 1996 (incorporated by reference to
the exhibit to the Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).

10.45 Convertible Debt Agreement by and between the Company and Amsterdam
Equities Limited, dated April 22, 1996 (incorporated by reference to the exhibit
to the Registrant's Form 10-QSB filed with the


                                       22
<PAGE>   23
Commission on September 23, 1996).

10.46 Letter of Agreement dated July 15, 1996 and effective August 9, 1996, by
and between the Company, Dr. Charles R. Mitchell, Stratum Management Inc., John
H. Hagan, Dr. Seymour Kessler, Amsterdam Equities Limited, Frank Leonard Laport,
and Beverly Trust Company (incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on September 23, 1996).

10.47 Settlement Agreement dated as of September 26, 1996, and effective as of
the date of filing, by and between the Gingle Group, the Investor Group and the
Company.

10.48 Amendment to Employment Agreement made as of June 1, 1996 by and among
Gary A. Lockwood, the Company and Mason Dental Midwest, Inc.

10.49 Office Lease dated as of September 13, 1996 between the Company and
EquiVest, Inc., a company owned by Frank Leonard Laport.

10.50 Equipment Lease dated as of September 13, 1996 between the Company and
Frank Leonard Laport.

10.51 Letter Agreement dated February 4, 1996 between Dr. Richard Staller and
the Registrant regarding the sale of the assets of the Dental Team of Delray
Beach.

10.52 Letter Agreement effective as of January 10, 1997 by and among the
Registrant and Drs. Barfield and Payne regarding the sale of the assets of the
Fairfield Dental Center practice.

10.53 Letter Agreement dated as of December 1996 between the Registrant and
Dickerson Investment Group, Inc., an entity affiliated with a shareholder of the
Registrant, regarding the loan of $175,000 to the Registrant.

10.54 Letter Agreement effective as of June 1, 1997 by and among the Registrant
and Mr. Larry Ceraulo d/b/a Certex Dental Studio regarding the sale of the
assets comprising Mason Dental Southeast, Inc. and Renaissance Dental Studio,
(Incorporated by reference to Exhibit 10.54 to the Registrant's Form 10-QSB for
the period ended June 30, 1997).

10.55 Modification Agreement dated as of July 1, 1997 by and among the
Registrant, Amsterdam Equities Limited, Frank Leonard Laport, and Beverly Trust
Company, as Custodian of the Frank Leonard Laport Rollover Individual Retirement
Account No. 75-49990, (Incorporated by reference to Exhibit 10.55 to the
Registrant's Form 10-QSB for the period ended June 30, 1997).

10.56 Allonge and Fourth Amendment to Acquisition Promissory Note dated as of
July 1, 1997, among the Company, Mason Dental Midwest, Inc. and the Constituent
Shareholders of the Delaware corporation formally known as Mason Dental, Inc.
(Incorporated by reference to Exhibit 10.56 to the Registrant's Form 10-QSB for
the period ended June 30, 1997).

10.57 Promissory Note in the initial principal amount of $96,357 executed by
Lawrence Ceraulo, Victor Texidor, and Certex Dental Studio, Inc. in favor of
Mason Dental Southeast and dated as of August 1, 1997, (Incorporated by
reference to Exhibit 10.57 to the Registrant's Form 10-QSB for the period ended
June 30, 1997).

10.58 Allonge & Fifth Amendment to Acquisition Promissory Note dated as of July
1, 1997, among the Company, Mason Dental Midwest, Inc. and the Constituent
Shareholders of the Delaware Corporation formally known as Mason Dental, Inc.


                                       23
<PAGE>   24
10.59 Agreement of purchase and sale dated as of May 1, 1997 between Princeton
Medical Management Northeast, Inc. and Valley Forge Dental Associates, Inc.

21.1 Subsidiaries of the Small Business Issuer (incorporated by reference to
Exhibit 22.1 to the Registrant's Form 10-KSB for the fiscal year ended December
31, 1993 (Registration Number 3343298-A) filed with the Commission on April 14,
1994).


                                       24
<PAGE>   25
(b) REPORTS ON FORM 8-K The Registrant filed the following Form 8-K's during the
period from January 1, 1997 through March 30, 1998:

          On January 16, 1997 the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K regarding the sale of the
assets of the Fairfield Dental Center practice to Drs. Barfield and Payne. The
Fairfield practice, with 1995 revenues of approximately $2,000,000, represented
approximately 11.9% of the total revenue of the Company. The Fairfield practice
was sold for a purchase price of approximately $885,000, of which approximately
$410,000 represented forgiveness of debt. (Also see Item 1)

          On February 11, 1997, the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K regarding the sale of the
assets of the Dental Team of Delray Beach practice to Dr. Richard Staller. The
Delray Beach practice, with 1995 revenues of approximately $859,135, represented
approximately 5.1% of the total revenue of the Company. The Delray Beach
practice was sold for a purchase price of approximately $200,000 in the form of
forgiveness of debt. (Also see Item 1)

          On May 23, 1997, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K regarding the sale of the assets
comprising the Century Dental Center to Valley Forge Dental Associates, P.C. The
Century Dental practice, with 1996 revenues of approximately $965,000,
represented approximately 5.3% of the total revenue of PDMC. The Century
practice was sold for $585,000. The sales price includes $235,000 in cash,
$140,000 in contingency payments, a $30,000 note receivable, and forgiveness of
debt of approximately $180,000. (Also see Item 1)

          On June 6, 1997, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K regarding the sale of the assets
comprising the Mason Dental Southeast, Inc / Renaissance Dental Studio to Mr.
Lawrence Ceraulo, individually and doing business as Certex Dental Studio. The
Mason Dental Southeast, Inc. / Renaissance Dental Studio, with 1996 revenues of
approximately $390,000, represented approximately 2.2% of the total revenue of
PDMC. The Mason Dental Southeast, Inc. / Renaissance Dental Studio was sold for
$92,096 in the form of a short-term note; and additional short-term note payable
to purchase supplies in the amount of $9,847; and an assumption of an existing
note payable of $18,372.

          On August 28, 1997, the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K regarding, (i) the approval by
the Registrant of a five-for-one reverse stock split of it's common stock, (ii)
the election of the Board of Directors of the Registrant, and (iii) the
Registrants Balance Sheet and Statement of Operations as of July 31, 1997.

          On September 29, 1997, the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K regarding the resignation of
Dr. Richard S. Sokol from the Registrant's Board of Directors.


                                       25
<PAGE>   26
                                 EXHIBIT 21.1
                        Subsidiaries of the Registrant

1.  Princeton Medical Management Midwest, Inc., a Michigan Corporation.

2.  Princeton Medical Management Northeast, Inc., a Florida Corporation.

3.  Princeton Medical Management Southeast, Inc., a Florida Corporation.

4.  Mason Dental Midwest, Inc., a Michigan Corporation.

5.  Mason Dental Southeast, Inc., a Florida Corporation.

6.  AmDisCo, Inc, an Illinois Corporation.


                                       26
<PAGE>   27
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report of Form 10-KSB for the year ended
December 31, 1997, to be signed on its behalf, by the undersigned thereunto duly
authorized.

              DATED:                   Princeton Dental Management Corporation

                                                By: __________________________
                                                              Gary A. Lockwood
                                                        President and Director


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report of Form 10-KSB for the year ended
December 31, 1997, to be signed on its behalf, by the undersigned thereunto duly
authorized.

              DATED:                  Princeton  Dental Management Corporation

                                                By: __________________________
                                                          Frank Leonard Laport
                                                   Chairman, CEO, and Director



              DATED:                  Princeton  Dental Management Corporation

                                                By: __________________________
                                                              Gary A. Lockwood
                                                   President, COO and Director




              DATED:                  Princeton  Dental Management Corporation

                                                By: __________________________
                                                             George B. Collins
                                                                      Director



              DATED:                  Princeton  Dental Management Corporation

                                                By: __________________________
                                                         Dr. Zigmund C. Porter
                                                                      Director



              DATED:                  Princeton  Dental Management Corporation

                                                By: __________________________
                                                          Barbara M. Kamenczak
                                                      Chief Accounting Officer


                                       27
<PAGE>   28
                                PRINCETON DENTAL
                             MANAGEMENT CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996
                   (WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>   29
[KIRKLAND, RUSS, MURPHY & TAPP LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Princeton Dental Management Corporation:

We have audited the accompanying consolidated balance sheets of Princeton Dental
Management Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Princeton Dental Management Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Princeton Dental Management Corporation will continue as a going concern.
As discussed in Note 15 to the consolidated financial statements, the Company's
recurring losses from operations and its net working capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern.
Management's operational plans in regard to these matters are also described in
Notes 14 and 15. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of reported asset
amounts or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.


/s/ KIRKLAND, RUSS, MURPHY & TAPP

March 6, 1998
Clearwater, Florida
<PAGE>   30
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                                   1997         1996
-----------------------------------------------------------------------------------
<S>                                                        <C>           <C>
                                     ASSETS

Current assets:
   Cash and cash equivalents                               $   46,644       185,235
   Accounts receivable, net of allowances for doubtful
     accounts of $189,000 and $297,000, respectively          922,383     1,170,640
   Current portion of loans receivable                        298,637         9,991
   Inventories                                                107,951       105,193
   Other current assets                                        89,513        95,847
                                                           ----------    ----------

             Total current assets                           1,465,128     1,566,906

Property and equipment, net                                   756,579     1,159,524
Goodwill, net of accumulated amortization of $2,001,616
   and $1,948,760, respectively                             5,542,358     7,002,192
Loans receivable                                               50,000        10,820
Other assets, net                                             441,936       543,512
                                                           ----------    ----------

                                                           $8,256,001    10,282,954
                                                           ==========    ==========
</TABLE>
<PAGE>   31
<TABLE>
<CAPTION>
DECEMBER 31,                                                         1997            1996
---------------------------------------------------------------------------------------------
                      LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                             <C>              <C>
Current liabilities:
   Bank debit balances                                          $     69,849               --
   Notes payable                                                      60,591          179,000
   Notes payable to shareholders                                          --          122,948
   Current portion of capital lease obligations                       18,849           25,883
   Current portion of long-term debt                                 849,184          715,806
   Convertible secured debt                                        2,133,428        2,115,924
   Accounts payable                                                  922,994        1,386,134
   Accrued salaries and wages                                        476,178          743,958
   Other accrued expenses                                            711,930          639,495
                                                                ------------     ------------

             Total current liabilities                             5,243,003        5,929,148

Long-term debt, excluding current portion                          1,787,436        3,267,106
Capital lease obligations, excluding current portion                  18,588           38,145
                                                                ------------     ------------

             Total liabilities                                     7,049,027        9,234,399
                                                                ------------     ------------

Shareholders' equity:
   Series A 11.75% Cumulative Convertible Preferred Stock
     par value $1.00 per share; authorized shares-1,000,000;
     issued and outstanding - 2,848 at December 31, 1997
     and 1996                                                          2,848            2,848
   Series B Preferred stock, par value $1.00 per share;
     authorized shares - 100; issued and outstanding-100
     at December 31, 1997 and 1996                                       100              100
   Common stock, par value $0.0001 per share;  authorized
     shares - 25,000,000; issued and outstanding-2,024,465
     at December 31, 1997 and 1996                                       202              202
   Less:  8,507 and 61,888 shares Common stock held in
     treasury, at cost at December 31, 1997 and 1996                (181,771)        (331,771)
   Additional paid-in capital                                     15,108,366       15,108,366
   Accumulated deficit                                           (13,722,771)     (13,731,190)
                                                                ------------     ------------

             Net shareholders' equity                              1,206,974        1,048,555
                                                                ------------     ------------

                                                                $  8,256,001       10,282,954
                                                                ============     ============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>   32
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                     1997             1996
--------------------------------------------------------------------------------------
<S>                                                      <C>              <C>
Revenue:
   Practice revenue                                      $  9,604,047       14,109,983
   Laboratory revenue                                       4,191,745        3,934,230
                                                         ------------     ------------

              Total revenue                                13,795,792       18,044,213
                                                         ------------     ------------

Expenses:
   Practice compensation and benefits                       7,166,391       10,827,174
   Other practice expenses                                  1,895,492        2,745,618
   Cost of laboratory revenue and laboratory expenses       3,389,324        3,529,297
   General corporate expenses                                 548,917        1,451,227
   Depreciation and amortization                              881,845        1,073,815
   Impairment of long-lived assets                                 --        3,499,172
                                                         ------------     ------------

              Total operating expenses                     13,881,969       23,126,303
                                                         ------------     ------------

Operating loss                                                (86,177)      (5,082,090)

Gain on sale of practices/lab                                 282,590               --
Loss on disposal of property and equipment                     (7,896)          (3,598)
Interest expense                                             (236,391)        (714,997)
Other income                                                   56,293           51,081
                                                         ------------     ------------

Income (loss) before provision for income taxes                 8,419       (5,749,604)

Provision for income taxes                                         --               --
                                                         ------------     ------------

              Net income (loss)                          $      8,419       (5,749,604)
                                                         ============     ============

Basic net income (loss) per share of common stock        $         --            (3.23)

Basic weighted common shares outstanding                    2,024,465        1,779,575
                                                         ============     ============

Diluted net income (loss) per share of common stock      $         --            (3.23)

Diluted weighted common shares outstanding                  3,019,483        1,779,575
                                                         ============     ============
</TABLE>


See accompanying notes to consolidated financial statements
<PAGE>   33
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                Series A 11.75%
                                             Cumulative Convertible         Series B
                                                Preferred stock          Preferred stock             Common stock
                                             ----------------------    --------------------    ------------------------   Treasury
                                             Shares        Amount      Shares      Amount       Shares         Amount       Stock
                                             ------     -----------    ------   -----------     ------      -----------   --------
<S>                                          <C>        <C>            <C>      <C>            <C>          <C>           <C>
Balances at December 31, 1995                    --     $        --       --      $    --      1,623,974       $ 162            --
Issuance of common stock at $7.05/
 share in lieu of cash bonus                     --              --       --           --         10,000           1            --

Issuance of Series A Preferred Stock
 in connection with refinancing               3,600           3,600       --           --             --          --            --

Issuance of common stock at $1.80/
 share upon conversion of Series A
 Preferred Stock and Convertible Debt          (882)           (882)      --           --        390,491          39            --

Issuance of Series A Preferred Stock            130             130       --           --             --          --            --

Issuance of Series B Preferred Stock             --              --      100          100             --          --            --

Conversion of 58,333 shares of
 common stock at $5.70/share into
  Series A Preferred Stock and
  Convertible Debt and 3,555 shares
  surrendered, held  in treasury                 --              --       --           --             --          --      (331,771)

Net loss                                         --              --       --           --             --          --            --
                                              -----     -----------      ---      -------      ---------       -----      --------

Balances at  December 31, 1996                2,848           2,848      100          100      2,024,465         202      (331,771)

Issuance of common stock of 53,381
 shares, held in treasury upon conversion
 of convertible debt                             --              --       --           --             --          --       150,000

Net income                                       --              --       --           --             --          --            --
                                              -----     -----------      ---      -------      ---------       -----      --------

Balances at December 31, 1997                 2,848     $     2,848      100      $   100      2,024,465       $ 202      (181,771)
                                              =====     ===========      ===      =======      =========       =====      ========
</TABLE>


<TABLE>
<CAPTION>
                                                 Additional                         Net
                                                   Paid-in      Accumulated     Shareholders'
                                                   Capital        Deficit          Equity
                                                 ----------     -----------     -------------
<S>                                             <C>            <C>              <C>
Balances at December 31, 1995                   14,055,695     (7,981,586)      6,074,271
Issuance of common stock at $7.05/
 share in lieu of cash bonus                        70,749             --          70,750

Issuance of Series A Preferred Stock
 in connection with refinancing                    356,377             --         359,977

Issuance of common stock at $1.80/
 share upon conversion of Series A
 Preferred Stock and Convertible Debt              612,675             --         611,832

Issuance of Series A Preferred Stock                12,870             --          13,000

Issuance of Series B Preferred Stock                    --             --             100

Conversion of 58,333 shares of
 common stock at $5.70/share into
  Series A Preferred Stock and
  Convertible Debt and 3,555 shares
  surrendered, held  in treasury                        --             --        (331,771)

Net loss                                                --     (5,749,604)     (5,749,604)
                                                ----------    -----------       ---------

Balances at  December 31, 1996                  15,108,366    (13,731,190)      1,048,555

Issuance of common stock of 53,381
 shares, held in treasury upon conversion
 of convertible debt                                    --             --         150,000

Net income                                              --          8,419           8,419
                                                ----------    -----------       ---------

Balances at December 31, 1997                   15,108,366    (13,722,771)      1,206,974
                                                ==========    ===========       =========
</TABLE>


See accompanying notes to consolidated financial statements.
<PAGE>   34
                    PRINCETON DENTAL MANAGEMENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                          1997           1996
----------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
Operating activities:
   Net income (loss)                                           $    8,419     (5,749,604)
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
         Depreciation and amortization                            881,845      1,076,836
         Impairment of long-lived assets                               --      3,499,172
         Loss on disposal of property and equipment                 7,896          3,598
         Interest expense                                              --        236,350
         Provision for bad debts                                 (108,298)        22,000
         Stock redemption price in excess of market                    --         18,229
         Issuance of stock under incentive Stock Bonus Plan            --         70,750
         Gain on sale of practices/lab                           (282,590)            --
         Changes in operating assets and liabilities:
             Accounts receivable                                   95,802        (54,171)
             Inventories                                          (12,605)         6,361
             Other current assets                                   6,334         23,054
             Accounts payable                                    (443,661)       771,452
             Accrued expenses                                    (111,095)       301,864
                                                               ----------     ----------

                 Net cash provided by operating activities         42,047        225,891
                                                               ----------     ----------

Investing activities:
   Purchase of property and equipment                            (145,971)      (153,299)
   Purchases of dental labs                                            --         (5,407)
   Proceeds from notes receivable                                 108,551          1,118
   Proceeds from sale of equipment                                  2,528             --
   Other assets                                                    12,093        (38,971)
   Proceeds from sale of practices/lab                            668,461             --
                                                               ----------     ----------

                 Net cash provided by (used in)
                   investing activities                           645,662       (196,559)
                                                               ----------     ----------

Financing activities:
   Proceeds from notes payable                                         --        179,000
   Proceeds from notes payable to shareholders                         --             --
   Proceeds from issuance of Series A preferred stock                  --         13,000
   Proceeds from issuance of convertible secured debt              17,504        187,000
   Proceeds from issuance of Series B preferred stock                  --            100
   Proceeds from issuance of long-term debt                            --         30,089
   Principal payments on notes payable                           (118,409)       (18,835)
   Principal payments on long-term debt                          (578,847)      (312,834)
   Principal payments on note payable to shareholders            (122,948)       (15,000)
   Principal payments on capital lease obligations                (23,600)       (31,489)
                                                               ----------     ----------

                 Net cash provided by (used in)
                   financing activities                          (826,300)        31,031
                                                               ----------     ----------
</TABLE>
<PAGE>   35
                    PRINCETON DENTAL MANAGEMENT CORPORATION

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                    1997          1996
--------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Increase (decrease) in cash and cash equivalents         $(138,591)       60,363

Cash and cash equivalents at beginning of period           185,235       124,872
                                                         ---------     ---------

Cash and cash equivalents at end of period               $  46,644       185,235
                                                         =========     =========
</TABLE>


Supplemental schedule of non-cash financing and investing activities:

During 1996, the President of the Company was issued 10,000 shares of common
stock valued at $70,750.

During 1996, $128,543 of debt, $12,816 of accrued interest, $150,000 of common
stock, and closing costs of $68,617 were converted into Series A Cumulative
Preferred stock.

During 1996, accrued interest of $223,534 and closing costs and fees of $448,279
were capitalized to the principal balance of the convertible debt.

During 1996, 58,333 shares of Regulation D common stock ($5.70/share) were
converted into $150,000 and $200,000 of Series A Preferred Stock and Convertible
Debt, respectively.

During 1996, $88,168 of Series A Cumulative Preferred stock and $611,832 of
convertible debt were converted into 390,491 shares of common stock.

During 1997 and 1996, the Company incurred $12,734 and $61,404, respectively of
capital lease obligations.

During 1997, the Company converted $150,000 of outstanding debt into 53,381
shares of common stock, previously held as treasury stock.

Interest paid was approximately $179,000 and $320,000 for the years ended
December 31, 1997 and 1996, respectively.



See accompanying notes to consolidated financial statements.
<PAGE>   36
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996



(1)     ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

        On October 22, 1986, the Company was organized as Princeton Dental
        Management Corporation, a Delaware corporation. The Company had limited
        activity up through its first issuances of common stock in June 1987.
        The Company owns and manages dental practices and labs in Florida and
        Michigan.

        (a)  Principles of Consolidation

             The consolidated financial statements include the accounts of the
             Company and its wholly-owned subsidiaries. All material
             intercompany transactions have been eliminated.

        (b)  Cash and Cash Equivalents

             The Company considers all highly liquid investments purchased with
             an original maturity of three months or less to be cash
             equivalents.

        (c)  Accounts Receivable

             Accounts receivable are comprised primarily of receivables from
             dental patients and insurance carriers. Credit is extended based on
             an evaluation of the customer's financial condition, and generally
             collateral is not required.

        (d)  Inventories

             Inventories, consisting principally of dental prosthetics, are
             stated at the lower of cost, determined by the first-in, first-out
             method, or market.

        (e)  Property and Equipment

             Property and equipment are stated at cost less accumulated
             depreciation and amortization. Depreciation is recorded using the
             straight-line method over estimated useful lives of five to nine
             years. Property and equipment held under capital leases and
             leasehold improvements are amortized straight-line over the shorter
             of the lease term or the estimated useful life of the asset.


                                                                     (continued)
<PAGE>   37
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



        (f)  Goodwill

             Goodwill represents excess of purchase price over the fair value of
             net assets acquired, net of any liabilities assumed, from dental
             practices and other operations acquired by the Company.
             Amortization of goodwill totaled approximately $473,000 and
             $654,000 for the years ended December 31, 1997 and 1996,
             respectively.

        (g)  Revenue Recognition

             The Company recognizes revenue in the month the related service is
             provided. Operating revenues include amounts estimated by
             management to be receivable from Medicaid and other third-party
             programs under provisions of reimbursement terms in effect.
             Differences between estimated payments and final payments are
             reflected as charges or credits to operating revenues when the
             payment is received.

        (h)  Income Taxes

             The Company uses the liability method of accounting for income
             taxes. Under this method, deferred tax assets and liabilities are
             determined based on differences between financial reporting and tax
             bases of assets and liabilities and are measured using the enacted
             tax rates and laws that will be in effect as the differences
             reverse.

        (i)  Estimates

             In preparing financial statements in conformity with generally
             accepted accounting principles, management makes estimates and
             assumptions that affect the reported amounts of assets and
             liabilities and disclosures of contingent assets and liabilities at
             the date of the financial statements, as well as the reported
             amounts of revenues and expenses during the reporting period.
             Actual results could differ from those estimates.

        (j)  Concentrations of Credit Risk

             Cash balances are maintained in financial institutions.
             Occasionally, deposits exceed amounts insured by the Federal
             Deposit Insurance Corporation.



                                                                     (continued)
<PAGE>   38
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        (k)  Impairment of Long-Lived Assets and for Long-Lived Assets to be
             Disposed Of

             In March 1995, the Financial Accounting Standards Board issued the
             Statement of Financial Accounting Standards 121, Accounting for the
             Impairment of Long-Lived Assets and for Long-Lived Assets to Be
             Disposed of (SFAS 121). SFAS 121 requires that long-lived assets
             and certain identifiable intangibles held and used by an entity be
             reviewed for impairment whenever events or changes in circumstances
             indicate that the carrying amount of an asset may not be
             recoverable. If the sum of the expected future cash flows
             (undiscounted and without interest) is less than the carrying
             amount of the asset, an impairment loss is recognized. Measurement
             of that loss would be based on the fair value of the asset. SFAS
             121 also generally requires long-lived assets and certain
             identifiable intangibles to be disposed of to be reported at the
             lower of the carrying amount or the fair value less cost to sell.
             SFAS 121 was effective for the Company's 1996 fiscal year end.

             During 1996, based upon the estimated fair value of certain
             practices, the Company wrote down identifiable goodwill of
             approximately $3,499,000.

        (l)  Fair Value of Financial Instruments

             At December 31, 1997 and 1996, the carrying value of all financial
             instruments approximated their fair values.

        (m)  Reclassifications

             The accompanying consolidated financial statements contain certain
             reclassifications of previously reported information. The
             reclassifications have been made to more appropriately reflect the
             operating results of the Company.

        (n)  Reverse Stock Split

             The Board of Directors authorized a one-for-five reverse stock
             split effective August 18, 1997. All share and per share data have
             been retroactively restated to give effect to this reverse stock
             split.

        (o)  Net Income (Loss) Per Share of Common Stock

             In the fourth quarter of 1997, the Company adopted Statement of
             Financial Accounting Standards No. 128, Earnings per Share (SFAS
             128). Under SFAS 128, basic net income (loss) per share of common
             stock is computed by dividing income available to common
             stockholders by the weighted average number of common shares
             actually outstanding during the period. Diluted net income (loss)
             per share of common stock presents income attributable to common
             shares actually outstanding plus dilutive potential common shares
             outstanding during the period. See Note 10 for the computation of
             basic and diluted net income (loss) per common stock as required by
             SFAS No. 128.

                                                                     (continued)
<PAGE>   39
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)     LOANS RECEIVABLE

        The majority of loans receivable have resulted from the sale of various
        practices/lab during 1997 (Note 12).

(3)     PROPERTY AND EQUIPMENT

        Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                     1997              1996
                                                 -----------          ---------
<S>                                              <C>                  <C>
Dental equipment                                 $   817,826          1,037,094
Laboratory and delivery equipment                    266,951            291,928
Office furniture and equipment                       247,142            207,206
Computer equipment and software                      306,361            339,786
Leasehold improvements                               236,591            334,261
                                                 -----------        -----------
                                                   1,874,871          2,210,275
Less accumulated depreciation
    and amortization                              (1,118,292)        (1,050,751)
                                                 -----------        -----------

                                                 $   756,579          1,159,524
                                                 ===========        ===========
</TABLE>

        Depreciation and amortization related to property and equipment totaled
        approximately $320,000 and $372,000, respectively for the years ended
        December 31, 1997 and 1996, including amounts classified within cost of
        laboratory revenue.

(4)     NOTES PAYABLE TO SHAREHOLDERS

        At December 31, 1996, notes payable to shareholders consist of a 13.25%
        demand note payable of $82,500 and demand notes totaling $40,448 to a
        shareholder's (who is also a former director) partnership. These notes
        have terms similar to the Letter Agreement (Note 14). While it was
        originally contemplated that these notes would be considered advances
        under the Financing Arrangements (Note 14), the partnership subsequently
        filed a lawsuit demanding repayment of these notes payable totaling
        $122,948 plus accrued interest During 1997, the Company repaid all
        amounts outstanding, including all accrued interest.


                                                                     (continued)
<PAGE>   40
                      PRINCETON DENTAL MANAGEMENT CORPORATION

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)     NOTES PAYABLE

        Notes payable as of December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Demand note payable to Dickerson Investment Group,
Inc. bearing interest at 1% over the prime rate (9.5%
at December 31, 1997).                                        $60,591    179,000
                                                              -------    -------

             Total notes payable                              $60,591    179,000
                                                              =======    =======
</TABLE>

        The Dickerson Investment Group, Inc. is controlled by a former owner of
        Mason.

(6)     LONG-TERM DEBT

        Long-term debt as of December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                               1997           1996
                                                                            -----------     ---------
<S>                                                                         <C>             <C>
Note payable to shareholders, issued in connection with the acquisition
of Mason. Payments may be contractually restricted based on Mason's
average monthly cash flow before intercompany transactions as defined in
the purchase agreement. If restricted, principal and interest payments
may be made in common stock of the Company. Beginning January, 1997, the
Company began making monthly installments of $21,610 with interest at 8%
through March 2006, secured by stock of Mason. Effective July, 1997,
interest was waived through June, 1998. The monthly principal
installments approximate $10,300 during this period. This waiver reduced
the effective interest rate over the remaining life of the loan. During
1997, $150,000 of this note was converted to common stock, previously
held in treasury.                                                           $ 1,416,572     1,787,536


Note payable to shareholder in monthly installments of $12,133,
including interest at 8% through January 1, 1998, with remaining
principal due January 1, 1998, secured by stock of American Dental
Health - Battle Creek, P.C.                                                     430,300       537,132
</TABLE>


                                                                     (continued)
<PAGE>   41
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            1997        1996
                                                                          --------     -------
<S>                                                                       <C>          <C>
Promissory notes payable to shareholder and shareholder
affiliate bearing interest at 8% per annum, payable in equal
monthly installments of $3,215 through April 1, 1998, with a
balloon payment of the unpaid principal balance payable with
the 60th payment.  Repaid in 1997.                                        $      -     189,460

Notes payable to individual investors, unsecured, bearing interest at
rates ranging from 8% to 10%, requiring various quarterly installments
ranging from $320 to $1,280, including interest, through October 1997.
Balance of $20,000, payable in equal quarterly installments of $5,000,
including interest at 12% through December 1998.                            20,000      34,324

Notes payable to seller of laboratory assets of Mason in monthly
installments of $5,000 including interest at 9% ($25,000 payable
October, 1998) through September, 1999.  Balloon payment
of approximately $30,000 due October, 1999.                                140,867     218,500

Note payable to shareholders in monthly installments of
$6,541 including interest at 8% through February 15, 2004,
secured by all assets transferred in connection with the acquisition
of CDN and by the stock of Fairfield Dental Center, P.A.  Repaid
in 1997.                                                                         -     426,440

Note payable to shareholders in monthly installments of $12,102
including interest at 7.48% through June 30, 2002, secured by all assets
transferred in connection with the acquisition of The Dental Team and
the stock of The Florida Dental Team P.A.                                  539,703     655,719

Unsecured note payable to shareholder, interest only due
monthly at 12%.  Upon demand of the shareholder, the note will
be paid in 36 equal monthly installments of $2,325 including
interest at 12%.  Incurred in connection with the acquisition
of The Dental Team.                                                         70,000      70,000
</TABLE>


                                                                     (continued)
<PAGE>   42
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          1997            1996
                                                                      -----------     -----------
<S>                                                                   <C>             <C>
Notes payable to various sellers of dental laboratory assets
bearing interest at rates ranging from 7% to 8%, payable
in monthly installments totaling $269, including interest
through April, 1998.                                                  $     1,062          24,226

Unsecured notes payable to certain shareholders of the Company,
bearing interest at 10%.  Payable in monthly installments totaling
$3,510 through October 1997.  Repaid in 1997.                                  --          13,321

Notes payable to financial institutions, secured by delivery
equipment, bearing interest ranging from 7.9% to 11.75%,
payable in monthly installments totaling $1,109, including
interest through February, 1999; $706 through June, 1999
and $304 through November, 1999.                                      $    18,116          26,254
                                                                      -----------     -----------
                                                                        2,636,620       3,982,912
Current portion of long-term debt                                        (849,184)       (715,806)
                                                                      -----------     -----------
Long-term debt, excluding current portion                             $ 1,787,436       3,267,106
                                                                      ===========     ===========
</TABLE>

        Substantially all long-term debt is secured by the assets of the
        Company, its subsidiaries, life insurance policies or various other
        assets.

        Scheduled maturities of long-term debt for the years subsequent to
        December 31, 1997 are as follows: 1998 - $849,184; 1999 - $339,960; 2000
        - $277,281; 2001, $277,999; 2002 - $221,309 and thereafter - $670,887.

(7)     CAPITAL LEASE OBLIGATIONS

        The Company is obligated under various lease agreements for certain
        office equipment. These leases are noncancelable and require monthly
        payments through April 2000. Following is a schedule of future minimum
        lease payments under capital leases:

<TABLE>
<S>                                                                    <C>
Year Ended December 31,
     1998                                                              $ 22,235
     1999                                                                19,033
     2000                                                                   656
                                                                       --------

     Total minimum lease payments                                        41,924

     Less amount representing interest                                   (4,487)

     Present value of net minimum lease payments                         37,437

     Less current portion of capital lease obligations                  (18,849)
                                                                       --------

     Capital lease obligations, excluding current portion              $ 18,588
                                                                       ========
</TABLE>


<PAGE>   43
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        The amortization of assets recorded under capital leases is included
with depreciation expense.

(8)     SHAREHOLDERS' EQUITY

        (a)  Preferred Stock

             The Company has authorized 1,000,000 shares of $1.00 par value
             Series A 11.75% Cumulative Preferred Stock and 100 shares of $1.00
             par value Series B Preferred Stock. Series of the Preferred Stock
             may be created and issued from time to time, with such
             designations, preferences, conversion rights (including voting
             rights), qualifications, limitations or restrictions thereof as
             shall be stated and expressed in the resolution or resolutions
             providing for the creation and issuance of such series of Preferred
             Stock.

        (b)  Stock Options and Warrants

             During 1993, the Company's Board of Directors adopted an Incentive
             and Non-Statutory Stock Option Plan (the 1993 Option Plan). Options
             under the 1993 Option Plan are either "incentive stock options"
             (ISOs), which are intended to qualify under Section 422A of the
             Internal Revenue Code of 1986, as amended, or "nonstatutory stock
             options" (NSOs), which are not intended to qualify. The exercise
             price of ISOs granted must be at least 100% of the fair market
             value of the common stock on the grant date, except that the
             exercise price of options granted to shareholders possessing more
             than 10% of the voting power of the Company's voting stock must be
             at least 110% of such fair market value.

             The price of NSOs shall be specified by the Board at the time the
             option is granted, and may be less than the fair market value of
             the underlying shares of common stock on the date such NSO is
             granted, but may not be less than the par value of the underlying
             shares of common stock. Each stock option granted under the 1993
             Option Plan expires on the date specified in the option agreement,
             which date shall not be later than the tenth anniversary of the
             date on which the option was granted (fifth anniversary in the case
             of a greater-than-10% shareholder). The Board of Directors approved
             67,900 shares to be reserved for issuance pursuant to the 1993
             Option Plan. The 1993 Option Plan will terminate in June 2003, or
             on such earlier date as the Board of Directors may determine.

             During 1996, the Company issued ISO's to two directors to purchase
             an aggregate of 50,000 shares of the Company's common stock at
             $5.95 per share, vesting in equal installments over three years
             commencing one year from the date of grant and expiring in March
             1999. Subsequent to the initial grant and pursuant to an agreement
             with the directors, the ISO grant was reduced to 32,400 shares of
             the Company's common stock (Note 13).


                                                                     (continued)
<PAGE>   44
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        During 1996, the Company issued a warrant to Stratum Management, Inc.
        and certain consultants to purchase 120,000 shares of the Company's
        common stock at $5.00 per share. The warrant expires December 31, 1998.
        Subsequent to issuance and pursuant to an agreement with Stratum
        Management, Inc. and certain consultants, the warrant was reduced to
        77,600 shares of the Company's common stock (Note 14).

        During 1996, the Company issued ISO's to an employee to purchase 20,000
        shares of the Company's common stock at $4.35 per share vesting in
        varying installments over three and one-half years and expiring in
        January 2003.

        On September 27, 1996, the Board of Directors declared an extension
        period of twelve months for the expiration date of the warrants issued
        pursuant to the Company's initial public offering on April 15, 1992.
        Further extensions beyond October 12, 1998 of the expiration date of
        these warrants may hereafter be determined by the Board of Directors up
        to a total of an additional twelve months or such additional time in
        such increments as the Board of Directors may determine in accordance
        with the terms of the related Warrant Agreement.

        The Company has adopted the disclosure - only provisions of Statement of
        Financial Accounting Standards No. 123, Accounting for Stock Based
        Compensation (SFAS 123). Accordingly, no compensation cost has been
        recognized for the stock option plans. Had compensation and other cost
        for the Company's stock option plan for employees or directors or issued
        warrants been determined based on the fair value at the grant date or
        issuance for awards in 1996, consistent with the provisions of SFAS 123,
        the impact on net loss would have been immaterial.

        Information regarding the employee option plan for 1997 and 1996 is as
        follows:

        Summary of the Status of the Company's Stock Options and Warrants

<TABLE>
<CAPTION>
                                               1997                               1996
                                     --------------------------             ----------------
                                               Weighted Average             Weighted Average
                                     Shares     Exercise Price     Shares    Exercise Price
                                     ------     --------------     ------    --------------
<S>                                  <C>          <C>              <C>         <C>
Outstanding at the beginning of
  the year                           140,000      $     5.90        12,000     $    14.90
Granted (exercise price equals
  market)                                 --              --       130,000           5.15
Exercised                                 --              --            --             --
Forfeited                                 --              --        (2,000)         10.00
                                     -------      ----------       -------     ----------

Outstanding at year end              140,000      $     5.90       140,000           5.90
                                     =======      ==========       =======     ==========

Options and warrants exercisable
  at year end                        104,400                        85,600
                                     =======                       =======

Weighted average fair value of
  options granted and warrants
  issued during the year                 N/A                      $    .80
</TABLE>
<PAGE>   45
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        Summary of Company Stock Options and Warrants Prices

<TABLE>
<CAPTION>
                OPTIONS AND WARRANTS OUTSTANDING                       OPTIONS AND WARRANTS EXERCISABLE
   ---------------------------------------------------------------     --------------------------------
                               Weighted average
    Range of        Number        remaining                              Number
    exercise     Outstanding     contractual      Weighted average     exercisable             Exercise
     price         12/31/97      life (years)      exercise price        12/31/97               price
    --------     -----------   ----------------   ----------------     -----------             --------
<S>              <C>           <C>                <C>                  <C>                    <C>
   $   20.00         4,000           5.0             $   20.00             4,000              $   20.00
       13.15         6,000           1.3                 13.15             6,000                  13.15
        5.95        32,400           1.3                  5.95            10,800                   5.95
        5.00        77,600           1.0                  5.00            77,600                   5.00
        4.35        20,000           5.0                  4.35             6,000                   4.35
   ---------       -------           ---             ---------           -------              ---------
   $   (4.35)
       20.00       140,000           1.7             $    5.90           104,400              $    6.10
   =========       =======           ===             =========           =======              =========
</TABLE>

        Additionally, certain default warrants are outstanding under the terms
        of the Financing Agreement (Note 14) which can be exercised only upon
        certain events of default, as defined.

(9)     INCOME TAXES

        The Company had no income tax expense in 1997 and 1996. The Company
        utilized tax net operating loss (NOL) carryforwards to offset taxable
        income in 1997.

        As of December 31, 1997, the Company has approximately $6,500,000 in tax
        net operating loss (NOL) carryforwards available to offset future
        taxable income through 2012.

        For financial statement reporting purposes, a valuation allowance of
        approximately $2,627,000 and $2,712,000 has been recognized to offset
        net deferred tax assets in 1997 and 1996, respectively. This valuation
        allowance (decreased) increased approximately $(85,000) and $800,000
        during 1997 and 1996, respectively. The utilization of NOL carryforwards
        may be delayed because of ownership changes resulting from the Company's
        initial public offering and other issuances of stock. The maximum amount
        of loss carryforwards allowed to be utilized each year is determined by
        multiplying the value of the Company at the time of the change in
        ownership by the federal long-term tax-exempt rate.


                                                                     (continued)
<PAGE>   46
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



        Deferred income taxes reflect the net tax effects of temporary
        differences between the carrying amounts of assets and liabilities for
        financial reporting purposes and the amounts used for income tax
        purposes. Significant components of the Company's deferred tax assets
        and liabilities as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                              1997           1996
                                                           -----------    -----------
<S>                                                        <C>            <C>
          Deferred tax assets:
             Net operating loss carryforwards              $ 2,533,000      2,555,000
             Allowance for doubtful accounts                    74,000        104,000
             Intangibles                                            --         66,000
             Other                                              20,000         17,000
                                                           -----------    -----------

               Total deferred tax assets                     2,627,000      2,742,000
                                                           -----------    -----------

             Valuation allowance for deferred tax assets    (2,627,000)    (2,712,000)
                                                           -----------    -----------
               Net deferred tax assets                              --         30,000
                                                           -----------    -----------

             Deferred tax liabilities:
             Fixed assets                                           --         30,000
               Intangibles                                          --             --
                                                           -----------    -----------

          Total deferred tax liabilities                            --         30,000
                                                           -----------    -----------

               Net deferred taxes                          $        --             --
                                                           ===========    ===========
</TABLE>

(10)      NET INCOME (LOSS) PER SHARE OF COMMON STOCK

          The following table represents the computation of basic and diluted
          net income (loss) per share of common stock as required by SFAS No.
          128.

<TABLE>
<CAPTION>
                                                               December 31,    December 31,
                                                                   1997           1996
                                                               ------------    ------------
<S>                                                            <C>             <C>
          Net income (loss)                                     $    8,419     (5,749,604)
          Preferred dividends                                           --             --
                                                                ----------     ----------
          Net income applicable to common
            share owners                                        $    8,419     (5,749,604)
                                                                ==========     ==========

          Basic weighted common shares outstanding               2,024,465      1,779,575
                                                                ----------     ----------

          Net income (loss) per common share                    $       --          (3.23)
                                                                ==========     ==========
</TABLE>
<PAGE>   47
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                   December 31,      December 31,
                                                       1997              1996
                                                   ------------      ------------
<S>                                                 <C>               <C>
Effect of dilutive securities:
  Warrants                                             995,018               --
  Dilutive weighted common shares
  outstanding                                        3,019,483        1,779,575
                                                    ----------        ---------
  Dilutive net income (loss) per common
      share                                         $       --            (3.23)
                                                    ==========        =========
</TABLE>

        Certain options, convertible debt and convertible preferred stock were
        not included in computing dilutive net income (loss) per share of common
        stock because their effects were anti-dilutive.

(11)    COMMITMENTS AND CONTINGENCIES

        (a)  Operating Leases

             The Company leases office facilities and equipment under various
             operating leases. Rent expense under operating leases was
             approximately $690,000 and $947,000 for the years ended December
             31, 1997 and 1996, respectively.

             The Company entered into operating leases for its corporate office
             and its telephone system, on a month to month basis, from its
             Chairman and Chief Executive Officer in September 1996. Monthly
             rent expense under these leases are $1,555 and $570, respectively.

             The future minimum lease payments under these operating leases for
             the years subsequent to December 31, 1997 are as follows: 1998;
             $744,000, 1999; $616,000, 2000; $473,000, 2001; $475,000, 2002;
             $271,000 and thereafter $85,000.

        (b)  Consulting and Employment Agreements

             During 1995, the Company entered into an agreement with Stratum
             Management, Inc. and certain individual consultants (collectively,
             the "Consultants") for consulting services effective June 20, 1995
             and continuing through 2006, terminable by either party at any
             time. Effective January 1, 1996, the Consultants received $42,000
             per month and a warrant to purchase 120,000 shares (subsequently
             reduced to 77,600 shares) of common stock at $5.00 per share.

             During 1996, the Company entered into an agreement with Dr. Charles
             R. Mitchell, who was appointed as President of the Company during
             1995. The agreement provided for an annual salary of $96,000,
             issuance of 10,000 shares of the Company's common stock and certain
             fringe benefits. The agreement had a three year term but could be
             terminated by either party upon certain conditions.
<PAGE>   48
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             In September 1996, in connection with the issuance of the Class B
             Preferred stock, the aforementioned Consulting and Employment
             agreements were terminated. In addition, the Consultants warrant to
             purchase common stock was reduced from 120,000 to 77,600 shares
             (Note 14).

             During 1996, the Company amended two employment agreements to
             increase annual compensation to approximately $107,000 per
             employee. In addition, one employee receives an additional $12,000
             annually for reimbursement of certain expenses and was granted
             incentive stock options (Note 8). The agreements provide for annual
             compensation increases and expire in May 2001 although either the
             employee or the Company may terminate the agreement upon ninety
             days written notice.

        (c)  Medical Malpractice Claims

             The Company is insured with respect to medical malpractice risks up
             to $1,000,000 per claim with a $3,000,000 annual aggregate claims
             limit.

(12)    BUSINESS ACQUISITIONS/SALES

        During 1996, the Company acquired the assets of two dental laboratories
        for approximately $5,000 in cash and promissory notes of approximately
        $28,000. The excess purchase price over the fair value of the assets
        acquired approximated $5,407.

        During 1997, the Company sold three dental practices and a laboratory
        for approximately $668,000 in cash, $436,000 in notes receivable (Note
        2) and the buyers' assumption of certain debt and other liabilities of
        $674,000. The Company recognized a gain on sale of these practices/lab
        of approximately $283,000. Combined sales of these entities for their
        last complete fiscal year (1996) was approximately $4,000,000.

(13)    LITIGATION

        The Company is involved in a number of legal proceedings related to
        malpractice, worker's compensation, general employment and contract
        disputes all in various stages of proceedings, most of which will be
        covered by insurance. Management believes settlements, if any, in excess
        of insurance coverage would be immaterial.

        During September 1996, the Company and certain investors prevailed in a
        lawsuit against two former officers and shareholders of the Company. As
        a result, the former officers and shareholders surrendered 3,555 shares
        of common stock to the Company. These surrendered shares are being held
        in treasury.


                                                                     (continued)
<PAGE>   49
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(14)    FINANCING AGREEMENT

        On April 22, 1996, the Company entered into a financing agreement
        pursuant to which the Company issued Convertible Secured Debt
        (Convertible Debt) of $2,483,620 and 3,599.77 shares of Series A 11.75%
        Cumulative Convertible Preferred Stock (Preferred Stock) to Amsterdam
        Equities Limited, Frank Leonard Laport and Beverly Trust Company, as
        custodian for the Frank Leonard Laport Rollover Individual Retirement
        Account No. 75-49990 (Investor Group). The Convertible Debt and
        Preferred Stock replaced indebtedness of the Company at April 22, 1996,
        in the amount of $1,976,700 incurred under a letter agreement dated
        December 7, 1994 (Letter Agreement) and that certain Secured Revolving
        Demand Note dated January 27, 1995 (the Secured Note). Under the terms
        of the Convertible Debt and Preferred Stock Agreements (also referred to
        herein collectively as the Financing Arrangements) the Investor Group
        may lend additional funds, in increments to be determined solely by the
        Investor Group. The funds may be used by the Company subject to the
        approval of the Investor Group, to fund certain acquisitions. The
        Convertible Debt and Preferred Stock were initially to bear interest and
        have a coupon rate, respectively of 11.75%, plus the payment of any
        withholding taxes which may be due and owing with respect to any person
        which is a foreign entity. Payments on the Convertible Debt/Preferred
        Stock were interest only due in quarterly installments which were to
        begin in September 1996. Interest accrued of $57,136 under the Financing
        Arrangements at June 30, 1996 was added to the principal balance at that
        date. The Convertible Debt/Preferred Stock originally had a maturity of
        seven years from the date of closing, subject to acceleration in the
        event of a default. Subsequent to September 30, 1996, the Company was
        unable to pay the interest only requirements of the Financing
        Arrangements, therefore effective October 1, 1996 until the accrued
        interest is paid, interest began to accrue at the default rate of
        21.75%. The accrued interest on the Convertible Debt totaled $193,600 at
        December 31, 1997 and 1996.

        In addition to the amount owed under the Letter Agreement and the
        Secured Note, the terms of the Financing Arrangements called for the
        conversion of 58,333 shares of Regulation D stock held by the Investor
        Group into $350,000 of Convertible Debt and Preferred Stock. The shares
        of common stock redeemed are being held in treasury.

        An additional provision of the Financing Arrangements included the
        payment of $300,000 as a closing fee and required the Company to
        reimburse the legal fees and out-of-pocket costs and expenses of the
        Investor Group in connection with the negotiation and the closing of the
        transaction totaling $216,897. The closing fees and reimbursement of the
        costs and expenses were paid in the form of Convertible Debt and
        Preferred Stock.

        The terms of the Financing Arrangements provided the Investor Group with
        certain rights pertaining to the registration of any common stock to
        which the Investor Group may convert from Convertible Debt or Preferred
        Stock, certain anti-dilution rights, and a right of first refusal on any
        future offering of the Company's securities.


                                                                     (continued)
<PAGE>   50
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        Under the terms of the transaction, the Company issued a warrant to
        purchase 100 shares of Series B Preferred Stock. The Series B Preferred
        Stock entitles Amsterdam Equities Limited (Amsterdam), after the
        occurrence of an event of default, to elect a Class B director who would
        have super-majority voting powers on the Company's Board of Directors.

        The Convertible Debt and Preferred Stock may be converted into common
        stock of the Company, at the sole option of the Investor Group, at
        various conversion rates as set forth in the conversion formula
        contained in the Financing Arrangements. Conversion pursuant to such
        conversion formula would result in a conversion price per share of the
        Company's common stock significantly below present market levels.

        In addition, pursuant to the terms of the Financing Arrangements, the
        Company issued to the holders of the Convertible Debt and the Preferred
        Stock warrants to purchase shares of common stock at an exercise price
        of $.50 per share (subsequently reduced to $.05 per share, subject to
        adjustment, under the terms of the Modification Agreement). The Investor
        Group may exercise the warrants only upon the occurrence of an event of
        default under the terms of certain minimum financial goals, as defined
        in the Financing Arrangements. As of December 31, 1997, the Company was
        in default under the Financing Agreement and the stated financial goals
        were not met, and, accordingly, the default warrants are exercisable by
        the Investor Group upon payment of the exercise price. Should the
        Company cure the default and meet the minimum financial goals, the
        default warrants would not be exercisable. The cumulative effect of the
        issuance of shares pursuant to the default warrant and conversion of all
        Convertible Debt and Preferred Stock could result in ownership by the
        Investor Group of approximately 85% of the Company's total issued and
        outstanding common stock. To date, the Investor Group has taken no steps
        to exercise these default warrants.

        In August 1996, the Company entered into a Letter Agreement by and among
        the Company, Dr. Charles R. Mitchell, a former President of the Company;
        the former Consultants to the Company, certain directors of the Company
        and the Investor Group. Under the Letter Agreement, the Series B
        Preferred Stock was amended to be immediately effective and Class B
        Preferred Stock was issued to Amsterdam. The Class B Preferred Stock
        entitled Amsterdam to elect a Director to the Board of Directors of the
        Company who would have super majority voting powers. In effect, the
        Class B director appointed by Amsterdam shall have the number of votes
        on the Board of Directors as the current Board currently holds, plus one
        vote. The amendment and activation of the Class B Preferred Stock
        occurred upon the satisfaction of the following two conditions: (i)
        delivery to the Company of a notice, pursuant to which the Investor
        Group would convert an aggregate amount of $700,000 of currently
        outstanding Convertible Debt and Preferred Stock into the Company's
        Common Stock in accordance with the contractual terms of the Financing
        Arrangements and (ii) upon the advance to the Company of an additional
        $200,000 pursuant to the Financing Arrangements.


                                                                     (continued)
<PAGE>   51
                     PRINCETON DENTAL MANAGEMENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



        In connection with the issuance of the Class B Preferred Stock, the
        provision of additional funding and conversion of debt, the Consultants
        and certain directors of the Company agreed to forfeit, on a pro rata
        basis, an aggregate amount of 60,000 options and warrants to purchase
        the Company's Common Stock.

        Pursuant to a Modification Agreement (Modified Agreement) entered into
        between the Investor Group and the Company dated July 1, 1997, the
        Investor Group agreed, conditioned upon continued listing by the Company
        on the Nasdaq SmallCap Market and similar concessions by another
        significant Company creditor, to waive all accumulated and ongoing
        interest and/or dividends on the Convertible Debt/Preferred Stock for
        the period from January 1, 1997 through December 31, 1997.

        The Convertible Debt is secured by substantially all assets of the
        Company and requires the Company to comply with certain financial and
        non-financial debt covenants.

        At December 31, 1997, the Company was in violation of certain debt
        covenants. As such, the Company has classified the Convertible Debt as a
        current liability. To date, the Investor Group has not made formal claim
        under the debt covenant violation.

(15)    GOING CONCERN

        As shown in the accompanying consolidated financial statements, the
        Company has incurred minimal profit and recurring losses from operations
        resulting in cash flow problems. Additionally, the Company is in default
        with regards to the Convertible Debt. To date, the Investor Group has
        not demanded payment. These factors raise doubt about the Company's
        ability to continue as a going concern.

        Management has instituted a cost reduction program, has sold
        economically inefficient practices and is emphasizing operational
        efficiencies. In addition, the Financing Arrangements (Note 14), could,
        at the discretion of the Investor Group, provide adequate funds for
        working capital, debt refinancing and future acquisitions. Additional
        funding from the Investor Group, however, cannot be assured.


(16)    SUBSEQUENT EVENT

        During fiscal year 1997, the Company failed to meet certain financial
        covenants related to the Financing Arrangements which has resulted in
        the ability of the Investor Group to exercise warrants to purchase
        approximately 1,000,000 shares of common stock at approximately $.05 per
        share effective January 1, 1998 (Note 14). To date, the Investor Group
        has not formally indicated an intent to exercise these warrants.