Edgar Filing: E-DENTIST COM INC

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

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2001.

[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from _________ to _________.

Commission file number 1-13725

e-dentist.com, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 76-0545043
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

2999 N. 44th Street, Suite 650
Phoenix, Arizona 85018
(Address of principal executive offices)

(602) 952-1200
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

The number of shares of Common Stock of the Registrant, par value $.001 per
share, outstanding at June 18, 2001 was 10,572,548.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the shares of the Registrant's Common Stock
held by non-affiliates of the Registrant at June 18, 2001 was approximately
$3,902,496 based upon the closing price per share of the Registrant's Common
Stock as reported on the American Stock Exchange of $0.50. As of June 18, 2001,
there were 10,572,548 outstanding shares of the Registrant's Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Stockholders of the Registrant to be held on August 2, 2001
are incorporated by reference into Part III of this Report.

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FORM 10-K REPORT INDEX

PART I
Items 1.
and 2. Business and Properties........................................... 4
Item 3. Legal Proceedings................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............... 11

PART II

Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters............................................... 12
Item 6. Selected Financial Data........................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 21
Item 8. Financial Statements and Supplementary Data....................... 22
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................... 45

PART III

Item 10. Directors and Executive Officers of the Registrant................ 45
Item 11. Executive Compensation ........................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management ....................................................... 45
Item 13. Certain Relationships and Related Party Transactions.............. 45

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 45

FORWARD-LOOKING STATEMENTS

Statements contained in this Report, which are not historical in nature,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are included in
Item 1. "Business", Item 5. "Market for Registrant's Common Stock and Related
Shareholder Matters" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, forward looking
information is provided regarding the development of an eBusiness strategy, the
modifications of Management Services Agreements with Affiliated Practices,
projections of the Company's future earnings, funding of the Company's
operations and capital expenditures, payment or nonpayment of dividends and
liquidity needed for the future.

Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include, but are not limited to, risks associated
with affiliations, fluctuation in operating results because of affiliations,
changes in government regulations, competition, growth of existing and new
affiliated dental practices and the potential need for additional funding. These
risks and other factors as may be identified from time to time are described in
further detail in the Company's reports filed with the Securities and Exchange
Commission or in the Company's press releases.

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

HISTORICAL OVERVIEW

e-dentist.com, Inc. (the "Company") began in March of 1998 as a dental
practice management company ("DMSO") under the name Pentegra Dental Group, Inc.
(Amex:PEN). Its formation included the simultaneous rollup of 50 dental
practices and an initial public offering ("IPO"). The capital raised at the IPO
was used to fund acquisitions of dental practices and the working capital needs
of the Company. Since the IPO, the Company has been headquartered in Phoenix,
Arizona. As a part of the IPO, the Company acquired the assets of a consulting
firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili
International ("Napili"), which was founded in 1963. The clinical,
administrative and marketing training developed and provided by these companies
to practicing dentists and their teams were the foundation for the Company's
historical approach to dental practice management ("the Pentegra Dental
Program"). The Pentegra Dental Program was available exclusively to Affiliated
Practices. To provide communication to its remote affiliated offices, the
Company developed a proprietary user interface and database driven communication
system, which employed Internet and browser technology. Growing from the
original 50 Affiliated Practices at the IPO, the Company grew to over 100
Affiliated Practices, which included approximately 140 dentists and 107 dental
offices located in 31 states. The Company's early mission was to provide
management, administrative, development and other services to its Affiliated
Practices through long-term Service Agreements ("Service Agreements") in
exchange for the payment of management service fees. These service fees were
based upon a percentage of dental practice collections. The Company's historical
net revenue included both the reimbursement of practice expenses as well as
Service Fees. Prior to the transition toward eBusiness, the Company processed
all payments to vendors and employed the staff of Affiliated Practices. The
modified Service Agreements caused the staff to cease working as employees for
the Company and they have become employees of the individual Affiliated
Practices. In addition, processing of payments to practice vendors is now
performed at the practice level, by practice employees. The Company no longer
pays or is reimbursed for expenses paid on the practices' behalf. As a result,
the components of net revenues and expenses have changed and decreased
significantly with the modified Service Agreements.

In the fourth quarter of fiscal year 2000, the Company announced that it
would be implementing a new business strategy to change from its historical
practice management business to a focus on an eBusiness and e-Learning strategy.
The Company's new strategic direction includes Business-to-Business (B2B) online
services and e-Learning services through its Internet or online portal found at
www.e-dentist.com. This shift in business model and focus was approved by the
shareholders at the annual shareholder meeting held in Phoenix, Arizona on
August 25, 2000. The shareholders also approved the Company's name change to
e-dentist.com, Inc. The Company is proposing to change its name from
e-dentist.com, Inc. to "EDT Learning, Inc." to more accurately reflect its
current business model and the expansion of the scope of its business offering
which focuses on providing e-Learning tools and systems to corporate clients
inside and outside of the dental industry. A name change of the Company to "EDT
Learning, Inc." was approved by the Board in June 2001. The name change will be
submitted to a shareholder vote at the August 2, 2001 Annual Shareholders
Meeting.

As a part of the new business plan approved by shareholders, the Company
modified the Affiliated Service Agreements, which were acceptable to both the
Company and the Affiliated Practices. The new modified Service Agreements
provide in general that:

1. The term of the Service Agreement has been reduced from its original
term of 30 to 40 years to a new term of only five (5) years from the
original date of execution.
2. All dental practice employees have become employees of the dental
practice, and accordingly the associated payroll and practice expenses
are being paid by the dentist and not the Company.
3. Service Fees have been reduced to a level approximating 90% of fiscal
year 2000 fees and fixed in amount for the balance of the Service
Agreement term.
4. All accounts receivable outstanding were either paid or converted to
an interest-bearing promissory note (average three-year term with an
annual interest rate of 10%).
5. The tangible practice assets originally contributed by the dental
practice will be transferred back to the dental practice at the end of
the amended Management Services Agreement term for a nominal value.

6. The Company be released by the dentist and dental practice of all
known and unknown claims by the dentist including breach of the
Service Agreement, securities claims or other claims related to the
affiliation transaction.

As of March 31, 2001, all but one of the active Service Agreements have
been modified or terminated. As a result of the modifications and terminations
of the Service Agreements, the Company prepared an impairment analysis to
determine the recoverability of the Management Services Agreement intangible
assets and fixed assets grouped at the practice level. The Company prepared the
analysis by calculating the expected discounted future cash flows under modified
contracts less the carrying amount of the intangible asset and fixed assets to
determine the impairment charge. Based on the modified and terminated Service
Agreements, the Company recorded a charge due to impairment of approximately $23
million for the year ended March 31, 2001. The fair value of the remaining
intangible assets associated with the Service Agreements will be amortized over
the remaining term of the modified Service Agreements.

LIQUIDITY AND MANAGEMENT PLANS

During fiscal 2001, the Company incurred a net loss of $24.9 million and
had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the
Company had a working capital deficit of $1.4 million at March 31, 2001.

At March 31, 2001, the Company was not in compliance with certain of the
financial covenants of the line of credit. At March 31, 2001, $9.3 million was
outstanding under the line of credit. In conjunction with the extension
discussed below, the bank has waived non-compliance of certain financial ratios
at March 31, 2001.

On June 29, 2001, Bank One, Texas, NA extended the terms of the credit
facility through July 2, 2002. In connection with the extension, the Company
will issue 393,182 warrants to acquire shares of the Company's common stock at
$0.42 per share. Until the credit facility is paid in full, the bank will have
the right to maintain a 3% fully diluted interest in the Company through the
issuance of additional warrants. The Company also paid $61,000 in fees to the
bank as part of the extension.

Terms of the extension include monthly principal payments of $25,000 and
modification of the financial covenants. The Company has prepared financial
projections through the term of the extension and believes it will be in
compliance with the financial covenants.

As discussed above, the bank credit facility due date has been extended to
July 2, 2002. Based upon its current strategy, the Company projects to have
sufficient funds to meet its operating capital requirements through fiscal 2002,
however, there would not be sufficient cash flow to fund the credit facility
obligation due July 2, 2002. Management believes it will be able to replace the
credit facility with other bank financing alternatives or refinancing of its
current line of credit. There is no assurance that other financing will be
available to refinance the current line of credit in sufficient amounts, if at
all, and there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position.

In order to increase its liquidity, the Company has developed the following
strategies; (i) implement its revised eCommerce and e-Learning based strategic
alternative described above, (ii) reducing costs in the Company's corporate
office, and (iii) raising additional capital through a private placement.
However, there can be no assurance that the Company's strategies will be
achieved.

EXPANSION OF MODEL AND FOCUS

bandwidth dial up modem connections. These systems required that sensitive
financial information for 100 businesses be transmitted in a secure environment.
To communicate with its Affiliated Practices, the Company built a proprietary
Intranet (virtual private network), which processed secure transactions over the
Internet. From that experience and using existing technology and systems, the
Company created an e-Learning engine and LMS, which provides an integrated
solution for corporate clients. The Company's learning management system was
created to be a web based, low bandwidth, cross browser compatible content
delivery and data management system.

The Company's LMS delivers web enabled content through a series of server
side components. Additionally, system navigation uses basic HTML and JavaScript
as its foundation. The user interface is providing information on the "look and
feel," navigation and learning content from a centrally located database.
Information on course navigation and testing is captured by the interface and
delivered to the database. Because of this design, the interface can be
optimized to use less than 20K of bandwidth and can deliver any web-enabled
content (from Word documents and Power Point presentations to Real Video and
MPEG video streams). The testing system is database enabled, which provides the
flexibility for the administrator to create test questions and determine their
testing requirements. The system has the ability to provide multiple test
environments to meet user needs and questions can be changed by the
administrator. The administrator can select from open book tests, closed book
tests, timed tests, random question tests, or smart tests (test questions by
category or lessons that are designed to identify skill weaknesses). There are
pre and post tests for each lesson and for the entire course and all testing
activity is recorded into the testing database.

In addition to interactive web based asynchronous training, the Company
offers a complete synchronous (live instructor led Web based) learning solution
utilizing advanced audio-graphics. The student is provided this instructor-led
classroom experience through the use of third party software and a Java-enabled
application. This live online classroom enables the student to interact with
instructors and other students and offers advanced features such as real-time
surveys, un-interrupted questioning of the instructor, and chat with other
students. Visual content is delivered over the Internet using a computer while
voice portions are delivered using an analog phone line to maximize bandwidth
connections. The Company maintains a broadcast studio in Phoenix, Arizona,
permitting instructors to either be located in the studio or remotely while they
deliver content, manage the classroom and interact with students. This live
delivery is fault tolerant using redundant systems, redundant data connections,
and smart routing to ensure the fastest response times. Content is developed
using internal teams, which enhance the learning experience from basic "slide"
delivery to engage the student with interactive presentation including 3D
graphics, animations, and streaming video.

INDUSTRY OVERVIEW

The Company employs a two-prong approach, which includes a B2B Internet
commerce Web site, and a second prong, which includes the provision of
e-Learning services to corporate clients. The Company launched its commerce
driven Web site in November 2000. Through it the Company also provides access to
online services in a Business-to-Business ("B2B") as well as consumer market
sectors. The Company also provides a broad range of services to dental practices
and dental vendors across the United States.

TRAINING Magazine estimates the corporate online training market to be
approximately $63 billion in 1999 and growing at an annual rate of 40%. Most
educational or training systems offered today by corporate America still utilize
instructor led classrooms and in person meetings. Today's in-house systems
typically:

* Do not offer user centric or personalized focused learning. They tend
to be singular in design and delivery with no consideration for a
particular student's needs.

* Use old technology usually focused on CD-Rom or other computer based
training (CBT) style delivery systems. Those systems do not permit
data gathering, which can be used to re-shape the delivery systems or
measure performance.

* Do not measure or address skills analysis or the gap caused by student
disparity in an organized fashion. Skills gap analysis is informally
performed by HR teams and mid-level managers without a comprehensive
framework across the entire corporate enterprise.

* Do not share information about the content being distributed or the
results of student testing among individual departments or segments
within departments.

* Do not allow users to receive information outside the course content,
which is supportive and provides post study organization and learning.

* Are diverse in scope and large in number making the investment
decision difficult, wasting resources, time and money.

* Are not easily deployed and often cause a "re-tooling" of the learning
system as they upgrade and make advancements in core content.

In contrast, today's e-Learning offers Internet solutions as an answer to
those shortcomings. Companies are continuing the shift from traditional
instructor-led training and CBT toward online learning and individual skills
assessment. Outsourcing corporate training needs provides an opportunity to
obtain cost competitive solutions. Efficiencies offered by new Internet or
web-based systems permit a reduction in corporate training costs while
increasing student (worker) productivity. The corporate training and education
market is highly fragmented with no clear or dominant player. The Company's
primary competition comes from those providing online and CBT solutions as well
as from corporations internally developing their own content. The market for
outside training can be further segmented into the delivery of live instructor
led programs or asynchronous interactive web based programs. Many corporations
prefer a blended approach consisting of both instructor led live programs and
web based e-Learning solutions. While many companies have entered the e-Learning
market they provide a wide variety of services and tend to specialize in one or
more of the following areas:

* Learning Tools -- Off The Shelf software used to create learning
courses.

* Delivery Services-- Hosting and delivery of training applications in
an Application Service Provider (ASP) or behind-the-firewall corporate
Intranet.

* Content Development (Custom & Off The Shelf)-- Courses created which
are either custom built using a proprietary tool or Off The Shelf tool
which may be web based or delivered with more traditional video or
CD-Rom technology.

SERVICES AND OPERATIONS

E-LEARNING SERVICES AND NEW SALES MODEL

The Company's sales and marketing strategy includes a plan to grow sales
through partnered sales channels, leveraging existing customer relationships,
and development of Off The Shelf course content. Additionally, the Company plans
to raise capital to consolidate the fragmented e-Learning sector through
acquisition of existing e-Learning companies. The core focus of the Company's
revenue driver exists in product and procedure training. This model provides the
corporate client with training on its existing products providing revenues to
the Company without the need for end-user marketing. The Company expects to
obtain re-seller and marketing agreements with companies to broaden the reach of
its products and services through those company's existing sales forces.
Additionally, the Company is developing an internal sales force, which is rooted
in targeted market segments. The Company's initial focus was within the dental
industry however, the Company is also targeting the pharmaceutical industry
through relationships driven from the dental industry. Finally, the Company
seeks to expand its sales and marketing efforts by and through the channels and
sales force opportunities provided by acquisitions of target companies in
strategic industries. Fees or revenues are generated through one of two means:
The first are fees from the development and delivery of custom course content
for an individual customer on a case-by-case basis depending upon the complexity
of the course and the features chosen by the customer. The second revenue source
is provided from usage of the Company's learning management systems. Revenues
are earned on a per user per month basis. However, the pricing, expense and
revenue model for the Company's e-Learning network has not been broadly tested
in the marketplace, and may not yield results sufficient for the Company's
business to succeed or be sustainable. If the pricing, expense and revenue model
is not acceptable to users, customers, or content providers, the Company's
e-Learning initiative may not be commercially successful. This would have an
adverse effect on the Company's business.

CURRENT TECHNOLOGY, E-LEARNING SYSTEMS AND TECHNOLOGY INFRASTRUCTURE

Management believes the current software and hardware utilized by the
Company is sufficient to host the current Web site and support the e-Learning
operations and services. Further, it has sufficient capacity to perform the
anticipated growth in transaction volume. The Company currently hosts its own
Web site, and such hosting will not bring any significant incremental costs. The
Company has already invested considerable time on system development, including
the development associated with the creation of the proprietary e-Learning
engine and learning management systems. To date, development has focused on
providing e-Learning services through customized user interfaces. The Company
has developed an LMS that delivers web-enabled content through a cross browser
compatible interface. The user interface is providing information on a "look and
feel" navigation and learning content from a centrally located database.
Information on course navigation and testing is captured by the interface and
delivered to the database. Because of this design, the interface can be
optimized to use less than 20K of bandwidth and can deliver any web-enabled
content (from Word documents and Power Point presentations to Real Video and
MPEG video streams).

The testing system is database enabled, which provides the flexibility for
the learning administrator to create test questions and determine their testing
requirements. The system has the ability to provide multiple test environments
to meet user needs and questions can be changed by the administrator. There are
pre and post tests for each lesson and for the entire course and all testing
activity is recorded into the testing database.

The user interface and course environment is completely customizable by the
administrator. Using the administrative tools provided, courses can be created
more quickly and updated with little to no programming required. Administrative
functions allow both the student and company to manage their own profiles, view
learning reports, administer students, deliver course materials, create
discussion groups and send user or class specific messages. The systems are
designed to create an online learning environment - not simply deliver content.

In addition to interactive web based asynchronous training, the Company
offers a complete synchronous (live instructor led) learning solution utilizing
advanced audio graphics. This live online classroom enables the student to
interact with instructors and other students and offers advanced features such
as real-time surveys, un-interrupted questioning of the instructor, and chat
with other students. Visual components are delivered over the Internet while
voice portions are delivered using an analog phone line to maximize bandwidth
connections. Classes can be delivered using the Company's studio in Phoenix,
Arizona, or remotely without the need for instructors to be in any certain
location. Course content is enhanced beyond basic "slide" delivery to engage the
student with interactive slides, 3D graphics, animations, and streaming video
where appropriate.

The e-Learning market is in the early stages of development, and may not
grow to a sufficient size or at sufficient rate for the Company's business to
succeed. Corporate training and education historically has been conducted
primarily through classroom instruction and traditionally has been performed by
internal personnel. Although technology-based training applications have been
available for several years, they currently account for only a small portion of
the overall training market. Accordingly, the Company's success will depend on
the extent to which companies migrate from traditional training methods to
technology-based solutions and use the Internet in connection with their
training activities. In addition, the Company's success will depend upon the
extent to which companies utilize the products or services of third-party
providers and whether companies adopt hosted solutions delivered over the
Internet, including e-Learning sites hosted by third parties, such as those on
the Company's e-Learning network.

The systems that support the Company's e-Learning network may be unable to
accommodate an increased volume of traffic or additional content if growth out
paces current estimates. As a result, the Company's e-Learning systems may
experience slower response times or other problems. In addition, the Company
depends on Internet service providers, telecommunications companies and the
efficient operation of their computer networks and other computer equipment for
the operation of the Company's e-Learning network. Each of these has experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems. Any
delays in response time or performance problems could cause users to perceive
the Company's e-Learning network as not functioning properly and therefore not
use it for their training needs.

COMPETITION

The Company is aware of several publicly traded and many privately held
e-Learning companies that have similar products and services which compete
directly with the Company's products and services. Certain of these competitors
have greater financial and other resources than the Company and have existing
clients and operations in areas where the Company may seek to expand in the
future. Additional e-Learning companies with similar objectives are expected to
enter the Company's markets and compete with the Company. There can be no
assurance that the Company will be able to compete effectively with their
respective competitors, that additional competitors will not enter their markets
or that additional competition will not have a material adverse effect on the
Company. Although these competitors have a head start in the development of
online e-Learning systems, the Company believes that its products and services
are competitive and that its e-Learning systems that are currently in place
provide an equivalent or better product than its competitors. Even if businesses
implement technology-based training or e-Learning solutions, they may still
choose to design, develop, deliver or manage all or a part of their education
and training internally. If technology-based learning and the use of the
Internet for learning do not become widespread, or if businesses do not use the
products and services of third parties to develop, deliver or manage their
training needs, then the Company's e-Learning products and services may not
achieve commercial success.

EMPLOYEES

As of March 31, 2001, the Company employed 27 persons at its corporate
offices and 6 persons at one Affiliated Practice office. None of the Company's
employees are represented by collective bargaining agreements. The Company
considers its employee relations to be good. Management believes that by the end
of July 2001, all dental practice employees located on dental practice premises
will be re-employed by the Affiliated Practice and accordingly no longer be an
employee of the Company.

SERVICE AGREEMENTS AND DENTIST AGREEMENTs

The Company continues to provide services to its Affiliated Practices in
accordance with the modified Service Agreements and derive revenues. The actual
terms of the various Service Agreements vary slightly on a case-by-case basis,
depending on negotiations with the individual Affiliated Practices. Those
Modified Agreements require in general that the Company provide: access to
online practice enhancement services; access to online tools and payroll
services; access to certain on-site consulting and seminar programs, and the use
of the tangible assets owned by the Company located at each affiliated dental
practice location. The service fees payable under the modified Service
Agreements are guaranteed by the owner-dentists. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations.") The new
modified Service Agreements provide in general that:

Substantially all of the dentist-owners of the Affiliated Practices entered
into a dentist agreement, which provides the Company such dentist's guarantee
(for the initial five years and for so long thereafter as he or she owns any
interest in the Affiliated Practice) of the Affiliated Practice's obligations
under the applicable Service Agreement. In addition, such agreement provides
that the dentist may not sell his or her ownership interest during the dentist's
five-year employment term without the Company's prior written consent. In the
event of a default under the Service Agreement by the Affiliated Practice, the
dentist agreement provides that the Company may, at its option, require the

Affiliated Practice to convey its patient records and the capital stock of the
Affiliated Practice to the Company's authorized designee, who, in any such case,
the Company anticipates will be a dentist affiliated with an Affiliated
Practice.

INSURANCE

The Affiliated Practices provide dental services to the public and are
exposed to the risk of professional liability and other claims. Each Affiliated
Practice maintains its own malpractice insurance. Although the Company does not
control the practice of dentistry by the Affiliated Practices, it could be
asserted that the Company should be held liable for malpractice of a dentist
employed by an Affiliated Practice. Each Affiliated Practice has undertaken
steps to comply with all applicable regulations and legal requirements. There
can be no assurance, however, that a future claim or claims will not be
successful or, if successful, will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at acceptable
costs.

GOVERNMENT REGULATION AND FEE-SPLITTING RESTRICTIONS

The dental services industry is regulated extensively at both the state and
federal levels. Regulatory oversight includes, but is not limited to,
prohibition of fee-splitting, corporate practice of dentistry, prohibitions on
fraud and abuse, restrictions on referrals and self-referrals, advertising
restrictions, restrictions on delegation and state insurance regulation. The
laws of many states permit a dentist to conduct a dental practice only as an
individual, a member of a partnership or an employee of a professional
corporation, professional association, limited liability company or limited
liability partnership. These laws prohibit business corporations such as the
Company from engaging in the practice of dentistry or employing dentists to
practice dentistry. The specific restrictions against the corporate practice of
dentistry, as well as the interpretation of those restrictions by state
regulatory authorities, vary from state to state. The restrictions are generally
designed to prohibit a non-dental entity (such as the Company) from controlling
the professional assets of a dental practice (such as patient records and payor
contracts), employing dentists to practice dentistry (or, in certain states,
employing dental hygienists or dental assistants) or controlling the content of
a dentist's advertising or professional practice. The laws of many states also
prohibit dentists from sharing professional fees with non-dental entities. The
Company believes that its operations will not contravene any restriction on the
corporate practice of dentistry, but there can be no assurance that
interpretation by courts or regulatory authorities will not result in
determinations that could prohibit or otherwise adversely affect the operations
of the Company under the Service Agreements. There can be no assurance that the
legality of the business relationship with the Affiliated Practices will not be
successfully challenged or that the enforceability of the provisions of any
Service Agreement will not be limited which may result in the reduction or
elimination of Service Fee revenues.

ITEM 3. LEGAL PROCEEDINGS

The Company has pending lawsuits against five Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
the Company is seeking damages equal to past due and remaining service fees,
consequential damages equal to the value of the intangible practice asset and
attorney's fees. Three Affiliated Practices have in response filed a
counter-claim alleging breach of contract, misrepresentation and securities
violations. The Company believes that those counter-claims are without merit and
that the Company will prevail both in the recovery of damages from the
Affiliated Practices as well as a defense to the alleged counter-claims.

The Company is also the defendant in a recently filed lawsuit in which the
plaintiff claims breach of the premises lease associated with an Affiliated
Practice. The Company as a defendant tenant is seeking indemnity from the
Affiliated Practice and believes that it will recover any damages suffered from
the responsible Affiliated Practice.

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

No matters were submitted to a vote of security holders in the fourth
quarter of fiscal 2001.

ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to Instruction 3 to Item 401(6) of Regulation S-K and General
Instruction G (3) to Form 10-K, the following information is included in Part I
of this Form 10-K. The following table sets forth certain information concerning
the executive officers of the Company (ages are as of March 31, 2001):

James M. Powers, Jr. 45 Chairman, President and Chief Executive Officer
Charles M. Sanders 44 Senior Vice President, Chief Operation Officer,
Chief Financial Officer
James L. Dunn, Jr. 39 Senior Vice President, General Counsel and Chief
Development Officer
Glenn J. Bonagura 43 Senior Vice President, eBusiness
Omer K. Reed, D.D.S. 69 Clinical Officer

JAMES M. POWERS, JR., DDS, MBA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dr. James Powers, Jr., has served as Chairman, President and CEO of the Company
since December 1998. Dr. Powers guided the Company through its initial growth
and acquisition phase and subsequent transformation from a dental practice
management company to a provider of uniquely effective and efficient custom
e-Learning solutions supporting companies in multi-industries. Dr. Powers joined
the Company through the merger with Liberty Dental Alliance, Inc., a Nashville
based company where he was the Founder, Chairman and President. Prior to
founding Liberty, he was a Founder and Chairman of Clearidge, Inc., a privately
held bottled water company in Nashville, Tennessee, that became one of the
largest, independent bottlers in the Southeast and was sold to Suntory, Inc.
Powers also is a Founder and Director of Barnhill's Country Buffet, Inc., a
chain of 34 restaurants in the Southeast. He received a Doctor of Dental Surgery
Degree from The University of Tennessee and received his MBA from Vanderbilt
University's Owen Graduate School of Management.

CHARLES SANDERS
SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER
Charles Sanders, joined the Company as Senior Vice President, Chief Operating
Officer in October 1999 and accepted the Chief Financial Officer
responsibilities in August 2000. Mr. Sanders is an integration specialist and an
experienced veteran of over 20 years in the healthcare industry. He most
recently was president of a $250 million division of a large physician
management company where he substantially increased profitability and was
responsible for marketing, operations, finance, human resources, and information
systems serving over 3875 employed and affiliated physicians located in five
states. Mr. Sanders' extensive background in operations, finance and information
technology includes experience as the CFO of a $75 million multi-site medical
facility and the regional IT director of a national HMO. Mr. Sanders received a
B.S.B.A. from Northern Arizona University in 1979.

JAMES L. DUNN, JR., JD, CPA
GENERAL COUNSEL, SENIOR VICE PRESIDENT, AND CHIEF DEVELOPMENT OFFICER
James L. Dunn, Jr., assisted with the formation of the Company and was an
integral part of the road show management team during the Company's initial
public offering. While the Company's focus was as a consolidator of dental
practices in the dental industry, Mr. Dunn was responsible for all development
and consolidation activities including the acquisition of dental practices and
dental practice management companies. In the first twelve months of operation,
he managed the acquisition of over fifty (50) dental practices thereby doubling
the Company's annual revenue run rate to $75 Million. Mr. Dunn assumed the role
of General Counsel in March of 2000 and managed the legal transition of the
Company from its dental management beginnings to its current e-learning focus.
He is an attorney and CPA receiving his law degree from Southern Methodist
University School of Law in 1987 and his Bachelor's Degree in Business
Administration-Accounting from Texas A & M University in 1984.

GLENN J. BONAGURA
SENIOR VICE PRESIDENT, EBUSINESS
Glenn joined e-dentist as Senior Vice President, eBusiness, in July 2000. Mr.
Bonagura has over 20 years of expanding responsibilities in several fields
including; Internet start up (Dexpo.com), consumer products (Gillette and
Unilever) and the dental industry (Oral B Laboratories). He most recently was
executive Vice President of Dexpo.com, the first Internet site where dental
professionals could purchase dental supplies. Prior to that, he has
international executive experience as a General Manager for the Gillette Company
where he was responsible for operations in 13 countries. Mr. Bonagura is also a
veteran of the dental industry where he held positions as Region sales manager,
National sales manager and VP of Sales for Oral B Laboratories. Mr. Bonagura's
employment agreement expires in July of 2001 and is not expected to be renewed.

OMER K. REED, D.D.S.
CLINICAL OFFICER
Dr. Reed has served as Clinical Officer since May 1997 and as a Director from
May 1997 until December 2000. He founded Pentegra, Ltd. in 1988 and Napili
International in 1963, and is a practicing dentist with one of the Company's
Affiliated Practices. Dr. Reed resigned from his position as a Director to
pursue personal interests and focus on his dental practice. His employment with
the Company ceased upon the expiration of his employment agreement in March of
2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION, HOLDERS AND DIVIDEND

The Company's Common Stock has been traded on the American Stock Exchange
system under the symbol "EDT" since August 25, 2000, prior to that the Company's
Common Stock was traded on the American Stock Exchange System under the symbol
"PEN". The following table sets forth the range of the reported high and low
sales prices of the Company's Common Stock for the year, ended March 31, 2001
and 2000:

2001 HIGH LOW
---- ---- ---
First Quarter $1.63 $0.50
Second Quarter $0.63 $0.38
Third Quarter $0.44 $0.19
Fourth Quarter $0.73 $0.22

2000 HIGH LOW
---- ---- ---
First Quarter $2.81 $1.38
Second Quarter $2.13 $1.56
Third Quarter $1.88 $1.00
Fourth Quarter $1.88 $0.88

As of June 18, 2001, there were approximately 242 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar of
Common Stock. The number of record holders does not bear any relationship to the
number of beneficial owners of the Common Stock. The last reported sale price of
the Common Stock on the American Stock Exchange as of March 31, 2001 was $0.45
per share.

The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividend on its Common Stock in the
foreseeable future. In addition, the terms of the Company's revolving credit
facility prohibit it from paying dividends or making other payments with respect
to its Common Stock without the lenders' consent. The Company's Board of
Directors intends, for the foreseeable future, to retain earnings to finance the
continued operation and expansion of the Company's business.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report.

STATEMENT OF OPERATIONS DATA

FOR THE PERIOD
FROM INCEPTION,
THREE MONTHS FEBRUARY 21, 1997
YEAR ENDED YEAR ENDED YEAR ENDED ENDED THROUGH
MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 DECEMBER 31, 1997
-------------- -------------- -------------- -------------- -----------------

Net revenue ................................ $ 12,458 $ 56,988 $ 38,824 $ -- $ --
Operating expenses ......................... 36,846 59,476 36,940 1,800 1,354
-------- -------- -------- -------- --------
Earnings (loss) from operations ............ (24,388) (2,488) 1,884 (1,800) (1,354)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary item .............. (24,987) (3,497) 1,717 (1,960) (1,354)
Income tax expense (benefit) ............... -- 2,213 (525) -- --
-------- -------- -------- -------- --------
Net income (loss) before
extraordinary item ........................ (24,987) (5,710) 2,242 (1,960) (1,354)
Extraordinary item, net .................... 70 350 -- -- --
-------- -------- -------- -------- --------
Net income (loss) .......................... (24,917) (5,360) 2,242 (1,960) (1,354)
Preferred stock dividend ................... -- -- -- (1,070) --
-------- -------- -------- -------- --------
Income (loss) attributable to
common stock .............................. (24,917) (5,360) 2,242 (3,030) (1,354)
======== ======== ======== ======== ========
Basic and diluted earnings per share:
Earnings (loss) before extraordinary
item..................................... $ (2.38) $ (0.55) $ 0.29
Extraordinary item ....................... .01 0.03 --
-------- -------- --------
Net earnings (loss) ...................... $ (2.37) $ (0.52) $ 0.29
======== ======== ========
BALANCE SHEET DATA

Cash and cash equivalents .................. $ 1,051 $ 553 $ 1,047 $ 6,708 --
Working capital (deficit) .................. (1,440) 1,330 4,224 3,640 --
Total assets ............................... 9,191 37,906 37,127 10,633 --
Long-term debt, less current maturities .... 11,461 14,829 13,134 368 --
Total shareholder's equity (deficit) ....... (6,654) 19,007 20,760 6,996 --

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF
E-DENTIST.COM AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN E-DENTIST.COM'S SEC FILINGS.

HISTORICAL OVERVIEW

In the fourth quarter of fiscal year 2000, the Company announced that it
would be implementing a new business strategy to change from its historical
practice management business to a focus on an eBusiness and e-Learning strategy.
The Company's new strategic direction includes Business-to-Business (B2B) online
services and e-Learning services through its Internet or online portal found at
www.e-dentist.com. This shift in business model and focus was approved by the
shareholders at the annual shareholder meeting held in Phoenix, Arizona on
August 25, 2000. The shareholders also approved the Company's name change to
e-dentist.com, Inc. A name change of the Company to "EDT Learning, Inc." was
approved by the Board in June 2001. The name change will be submitted to a
shareholder vote at the August 2, 2001 Annual Shareholders Meeting.

1. The term of the Service Agreement has been reduced from its original
term of 30 to 40 years to a new term of only five (5) years from the
original date of execution.
2. All dental practice employees have become employees of the dental
practice, and accordingly the associated payroll and practice expenses
are being paid by the dentist and not the Company.
3. Service Fees have been reduced to a level approximating 90% of fiscal
year 2000 fees and fixed in amount for the balance of the Service
Agreement term.
4. All accounts receivable outstanding were either paid or converted to
an interest-bearing promissory note (average three-year term with an
annual interest rate of 10%).rage three-year term with an annual
interest rate of 10%).y note (average three-year term with an annual
interest rate of 10%).
5. The tangible practice assets originally contributed by the dental
practice will be transferred back to the dental practice at the end of
the amended Management Services Agreement term for a nominal value.
6. The Company be released by the dentist and dental practice of all
known and unknown claims by the dentist including breach of the
Service Agreement, securities claims or other claims related to the
affiliation transaction.

EXPANSION OF MODEL AND FOCUS

As an extension of its educational and training background, the Company has
broadened its reach to focus on the larger growing e-Learning and corporate
training market. With the launch of the Company's state of the art learning
management system (LMS) and its e-Learning engine, the Company now provides a
comprehensive array of e-Learning content, hosting and delivery services to
corporations, inside and outside the dental and healthcare industries. The
Company's synchronous and asynchronous content delivery solutions provide an
array of e-Learning products that are customized to each corporate client. The
Company is positioning itself in the corporate training sector of the e-Learning
marketplace leveraging its existing infrastructure and using scale provided by
an integrated product. The Company's initial business model required that it be
able to communicate with 107 remote locations using the Intranet and low
bandwidth dial up modem connections. These systems required that sensitive
financial information for 100 businesses be transmitted in a secure environment.
To communicate with its Affiliated Practices, the Company built a proprietary
Intranet (virtual private network), which processed secure transactions over the
Internet. From that experience and using existing technology and systems, the
Company created an e-Learning engine and LMS, which provides an integrated
solution for corporate clients. The Company's learning management system was
created to be a web based, low bandwidth, cross browser compatible content
delivery and data management system.

classroom experience through the use of third party software and a Java-enabled
application. This live online classroom enables the student to interact with
instructors and other students and offers advanced features such as real-time
surveys, un-interrupted questioning of the instructor, and chat with other
students. Visual content is delivered over the Internet using a computer while
voice portions are delivered using an analog phone line to maximize bandwidth
connections. The Company maintains a broadcast studio in Phoenix, Arizona,
permitting instructors to either be located in the studio or remotely while they
deliver content, manage the classroom and interact with students. This live
delivery is fault tolerant using redundant systems, redundant data connections,
and smart routing to ensure the fastest response times. Content is developed
using internal teams, which enhance the learning experience from basic "slide"
delivery to engage the student with interactive presentation including 3D
graphics, animations, and streaming video.

RESULTS OF OPERATIONS

Following completion of the IPO, the Company began operations effective
April 1, 1998. Prior to April 1, 1998, the Company was not an operating entity
and therefore had no net revenue and incurred only minor pre-operating expenses.
In May 1998, the Company changed its fiscal year end from December 31 to March
31, effective for the year beginning April 1, 1998. Management service fee
recognition and related expenses began April 1, 1998, and the Company began
managing 50 dental practices in 18 states. At March 31, 2000, Pentegra managed
96 practices in 106 offices in 29 states. At March 31, 2001, the Company managed
85 practices in 95 offices in 28 states.

COMPONENTS OF REVENUES AND EXPENSES

The Company has embarked upon a strategy focusing on eBusiness primarily in
the dental industry. Prior to the transition toward eBusiness, the Company
processed all payments to vendors and employed the staff of Affiliated
Practices. The modified Service Agreements caused the staff to cease working as
employees for the Company and they have become employees of the individual

Affiliated Practices. In addition, processing of payments to practice vendors is
now performed at the practice level, by practice employees. The Company no
longer pays or is reimbursed for expenses paid on the practices' behalf. As a
result, the components of net revenues and expenses have changed and decreased
significantly with the modified Service Agreements.

Under the terms of the original Services Agreement with an Affiliated
Practice, the Company served as the exclusive manager and administrator of all
non-dental services relating to the operation of an Affiliated Practice. The
obligations of the Company included assuming responsibility for the operating
expenses incurred in connection with managing the dental centers. These expenses
included salaries, wages and related costs of non-dental personnel, dental
supplies and laboratory fees, rental and lease expenses, promotion and marketing
costs, management information systems and other operating expenses incurred at
the Affiliated Practices. In addition, the Company incurred general and
administrative expenses related to the financial and administrative management
of dental operations, insurance, training and development and other typical
corporate expenditures. As compensation for its services under the original
Services Agreement and subject to applicable law, the Company was paid a
management fee comprised of two components: (1) the costs incurred by it on
behalf of the Affiliated Practice, and (2) a management fee either fixed in
amount, an amount usually approximating 35% of the Affiliated Practice's
operating profit, before dentist compensation or 15% of the affiliated
practice's collected gross revenue ("Service Fee"). Therefore, net revenues
represented amounts earned by the Company under the terms of its Service
Agreements with the Affiliated Practices, which generally equated to the sum of
the Service Fees and the operating expenses that the Affiliated Practices paid
to the Company under the Service Agreements.

NET REVENUE

Fiscal 2001 net revenue was $12.5 million, a $44.5 million decrease from
fiscal 2000 net revenue of $57 million. The decrease is due to the modification
of the Service Agreements and the resulting elimination of pass through revenue
and expense reporting and the termination of 11 Affiliated Practices during
fiscal 2001. Net revenue generated by paying the operating expenses of the
Affiliated Practices was $4.2 million in fiscal 2001 and $46.4 million in fiscal
2000, a decrease of $42.2 million. Net revenue generated from service fees was
$8.3 million in fiscal 2001 compared with $10.6 million in fiscal 2000, a
decrease of $2.3 million.

Fiscal 2000 net revenue was $57 million, an $18.2 million increase over
fiscal 1999 net revenue of $38.8 million. The increase resulted from practice
affiliations with 12 additional dental practices in conjunction with the
acquisition of Omega Orthodontics, Inc. In addition, fiscal 2000 contains a full
twelve-months of revenue generated from the acquisitions of practices during
fiscal 1999.

OPERATING EXPENSES

Operating expenses consist primarily of salaries, wages and benefits,
dental supplies and laboratory fees, rent, advertising and marketing, and
general and administrative expenses. Fiscal 2001 operating expenses were $36.8
million, a $22.7 million decrease from fiscal 2000 operating expenses of $59.5
million. The elimination of pass through revenue and expense reporting caused by
the modification and terminations of the Service Agreements decreased operating
expenses by $42.2 million in fiscal 2001. General and administrative expenses
decreased by $3.3 million and depreciation and amortization expenses decreased
by $136,000 during fiscal 2001. These decreases were offset by the impairment
charge of $23 million recorded in fiscal 2001.

Fiscal 2000 operating expenses were $59.5 million, an increase of $22.6
million over fiscal 1999 operating expenses of $36.9 million. The increase is
due to the affiliation with the 12 additional practices in conjunction with the
acquisition of Omega Orthodontics Inc. and the full years expenses of the fiscal
1999 Practice Affiliations.

General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries, wages and benefits, bad
debt expenses, rent, consulting fees, travel (primarily related to practice
development and practice enhancement), office costs and other general corporate
expenses. General and administrative expenses represented 58.9%, 18.6% and 11.6%
of net revenue for fiscals 2001, 2000 and 1999 respectively. Fiscal 2001 general
and administrative expenses were $7.3 million, a $3.3 million decrease from
fiscal 2000 operating expenses of $10.6 million. The decrease is primarily due
to decreases in bad debt expense of $2.8 million, professional fees of $209,000,
seminars and education of $156,000, and salaries and wages of $97,000.

Fiscal 2000 general and administrative expenses were $10.6 million, an
increase of $6.1 million over fiscal 1999 general and administrative of $4.5
million. The increase in general and administrative costs was primarily due to
the provision for uncollectible accounts and notes receivable of $4.5 million.
In addition, the Company incurred higher general and administrative expenses
because it provided services to the increased number of practices in fiscal 2000
over fiscal 1999.

In fiscal 2001, accounts receivable are amounts due from Affiliated
Practices related to management services fees not yet paid. Notes receivable
represent conversion of accounts receivable from Affiliated Practices, past
advances made to practices for a practice acquisition by the Affiliated
Practice, or past advances made for working capital. At March 31, 2001, the
Company provided $1.7 million for accounts receivable and notes receivable
deemed uncollectible.

In fiscal 2000 and 1999, accounts receivable are amounts due from
Affiliated Practices related to expenses paid on their behalf by the Company, or
management fees not yet paid. Notes receivable represent advances made to
practices for a practice acquisition by the Affiliated Practice, or advances
made for working capital. At March 31, 2000 and 1999, the Company provided $4.5
million and approximately $125,000 respectively for accounts receivable and
notes receivable deemed uncollectible. The increase in the provision for
uncollectible receivables during 2000 resulted from experiencing adequate
operating history to determine required reserves for accounts and notes deemed
uncollectible. The provision for uncollectible accounts includes the amounts
deemed uncollectible as a result of the settlements with these practices.

Depreciation and amortization expenses represented 19.0%, 4.4% and 3.1% of
net revenue for fiscal 2001, 2000 and 1999, respectively. Fiscal 2001
depreciation and amortization expenses were $2,368,000, a $136,000 decrease from
fiscal 2000 depreciation and amortization expenses of $2,504,000. The decrease
is primarily due to the modification and terminations of the Service Agreements.

Fiscal 2000 depreciation and amortization expenses were $2.5 million, an
increase of $1.3 million over fiscal 1999 depreciation and amortization expenses
of $1.2 million. The increase is due primarily to the acquisition of fixed
assets and Management Services Agreements in conjunction with Practice
Affiliations.

INCOME TAX EXPENSE

The Company recorded no tax benefit during fiscal 2001 because it concluded
it is not likely it would be able to recognize the tax asset created due to the
lack of operating history of its eBusiness plan. At March 31, 2001, the Company
has a net deferred tax asset of $9.6 million with a corresponding valuation
allowance. Additionally, the Company also has $6.1 million of available
deductions related to the increase in tax basis of the assets acquired in the
Affiliations. Any tax benefits will be recognized over a period of seven to
fifteen years.

Income tax expense for fiscal 2000 totaled $2.2 million. The expense arose
primarily because the Company recorded a valuation allowance for its entire
deferred tax asset. The Company recorded the valuation allowance because it
concluded it is not likely it would be able to recognize the tax assets because
of no operating history of its new implementation of eBusiness plan,
modification of its Management Services Agreements and maturity of its line of
credit.

Income tax benefit for fiscal 1999 was $525,000.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, the Company had a working capital deficit of $1.4
million. Current assets included $1.1 million in cash and $500,000 in accounts
and notes receivable from the Affiliated Practices. Current liabilities
consisted of $1.1 million of deferred revenue, $816,000 of current maturities of
long-term debt and capital leases and $959,000 in accounts payable and accrued
liabilities.

On June 1, 1998, the Company closed a revolving bank credit facility with
Bank One, Texas, and N.A., which provide the Company with a revolving line of
credit of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working capital.
The credit facility is collateralized by liens on certain of the Company's
assets, including its rights under the Management Services Agreements and
accounts and notes receivable. The credit facility contains restrictions on the
incurrence of additional indebtedness and payment of dividends on the Company's
common stock. Additionally, compliance with certain financial covenants is

required and the lender has approval rights with respect to acquisitions
exceeding certain limits. At March 31, 2001, $9.3 million was outstanding under
the revolving line of credit.

Cash generated from investing activities resulted from the collection of
notes receivable of $533,000 and $116,000 in fiscal 2001 and 2000, respectively.
Cash used in investing activities was $138,000, $347,000 and $1.4 million for
the purchases of capital equipment, mostly for assets acquired in new practice
affiliations in fiscal 2001, 2000 and 1999, respectively. The Company invested
$0, $472,000 and $10.3 million in fiscal 2001, 2000 and 1999, respectively for
the purchase of intangibles associated with acquisitions. Uses of cash also
include the issuance of notes receivable to Affiliated Practices of $24,000,
$279,000 and $1.3 million in fiscal 2001, 2000 and 1999, respectively.

During fiscal 2001 and 2000, $1.2 million and $984,000 was used to repay
long-term debt. No repayment of long-term debt occurred in fiscal 1999. There
were no draws on the line of credit in fiscal 2001. Cash generated from
financing activities in fiscal 2000 and 1999 included draws on the revolving
line of credit of $2.1 million and $8 million respectively. The Company received
$2.9 million from the issuance of common and redeemable preferred stock in
fiscal 1999.

In fiscal 2001 and 2000, the Company entered into capital lease agreements
for the purchase of dental equipment, $22,000 and $1.4 million, respectively.

E-LEARNING SERVICES AND NEW SALES MODEL

The Company's sales and marketing strategy includes a plan to grow sales
through partnered sales channels, leveraging existing customer relationships,
and development of Off The Shelf course content. Additionally, the Company plans
to raise capital to consolidate the fragmented e-Learning sector through
acquisition of existing e-Learning companies. The core focus of the Company's
revenue driver exists in product and procedure training. This model provides the
corporate client with training on its existing products providing revenues to
the Company without the need for end-user marketing. The Company expects to
obtain re-seller and marketing agreements with companies to broaden the reach of
its products and services through those company's existing sales forces.
Additionally, the Company is developing an internal sales force, which is rooted
in targeted market segments. The Company's initial focus was within the dental
industry however; the Company is also targeting the pharmaceutical industry
through relationships driven from the dental industry. Finally, the Company
seeks to expand its sales and marketing efforts by and through the channels and
sales force opportunities provided by acquisitions of target companies in
strategic industries. Fees or revenues are generated through one of two means:
The first are fees from the development and delivery of custom course content
for an individual customer on a case-by-case basis depending upon the complexity
of the course and the features chosen by the customer. The second revenue source
is provided from usage of the Company's learning management systems. Revenues
are earned on a per user per month basis. However, the pricing, expense and
revenue model for the Company's e-Learning network has not been broadly tested
in the marketplace, and may not yield results sufficient for the Company's
business to succeed or be sustainable. If the pricing, expense and revenue model

is not acceptable to users, customers, or content providers, the Company's
e-Learning initiative may not be commercially successful. This would have an
adverse effect on the Company's business.

ACQUISITION OF LIBERTY DENTAL ALLIANCE

On November 13, 1998 the Company and Liberty Dental Alliance, Inc.
("Liberty") entered into an Agreement and Plan of Merger (the "Liberty Merger
Agreement"), pursuant to which Liberty became a wholly owned subsidiary of the
Company, and James M. Powers, Jr., D.D.S. was named President of the Company.
The Liberty Merger Agreement provided the Company pay Liberty common
stockholders, consideration for completed Liberty affiliations.

In connection with the Liberty Merger Agreement, the Company has agreed to
pay investment-banking fees of up to $100,000 to SunTrust Equitable Securities
Corporation. This amount was paid in fiscal 2002. The Company issued an
aggregate of 145,000 options to acquire the Company's common stock to certain
consultants of the Company with an exercise price of $6.125 per share, in the
same proportions and upon completion of Liberty Affiliations as the Additional
Common Merger Consideration.

As of March 31, 2000, the Company had completed all Liberty Affiliations
with 17 dental practices of which all were completed during fiscal 1999. These
dental practices generated aggregate annual patient revenue of approximately $13
million during their most recently completed fiscal year, and include dentists
treating patients in 17 dental offices. The aggregate consideration paid by the
Company for these practices consisted of approximately $5.6 million in cash,
1,295,268 shares of the Company's common stock and approximately $3.6 million
aggregate principal amount of 6% Series A convertible subordinated notes,
one-half payable November 2002 and one-half payable November 2003, and $160,000
aggregate principal amount of 6% of Series B convertible subordinated notes,
one-half payable April 2003 and one-half payable April 2004.

The consideration paid pursuant to the Liberty merger on the Liberty
affiliations consisted of approximately $444,000 in cash, 423,356 shares of the
Company's common stock, the assumption of approximately $350,000 in liabilities
of Liberty and 92,550 options to purchase the Company's common stock.

ACQUISITION OF OMEGA ORTHODONTICS

On July 1, 1999, the Company executed a merger agreement with Omega
Orthodontics, Inc. ("Omega"). In exchange for the approximately 5.0 million
shares outstanding of Omega, the Company issued approximately 1.8 million shares
of the Company's stock, and assumed approximately $1.1 million in debt. The
merger was accounted for under the purchase method of accounting. The twelve
Omega practices represent approximately $11.0 million in annualized practice
revenues in fiscal 2000.

ASSET PURCHASE

On October 13, 2000, the Company entered into an Asset Purchase Agreement
with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000
shares of the Company's common stock with an additional 500,000 shares to be
hold in escrow and paid contingent upon certain performance criteria of the
Company's common stock.

RECENT PRONOUNCEMENTS

In June 2000, FASB has issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (as amended by SFAS No. 137) and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements require recognition of all derivatives as either
assets or liabilities on the balance sheet and measurement of those instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income (loss). Appropriate accounting
for changes in fair value of derivatives held is dependent on whether the
derivative transaction qualifies as an accounting hedge and on the
classification of the hedge transaction. Management believes that the adoption
of SFAS No. 133 and 138 will not have a material effect on the Company's
financial statements.

costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The adoption of the pronouncement did not have an impact on the
Company's position or the results of the operations.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements"(as amended by SAB 101A and 101B)
that provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies and was adopted by the
Company. The adoption of the pronouncement did not have an impact on the
Company's position or the result of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates on
borrowed funds, which could affect its results of operations and financial
condition. At March 31, 2001, the Company has $9.3 million in variable rate debt
outstanding and, as such, the risk is immaterial based upon a 10% increase or
decrease in interest rates from their March 31, 2001 levels.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

PAGE(S)
-------
FINANCIAL STATEMENTS:

Report of Independent Accountants......................................... 23

Consolidated Balance Sheets at March 31, 2001 and 2000.................... 24

Consolidated Statements of Operations for the years ended
March 31, 2001, 2000 and 1999............................................. 25

Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended March 31, 2001, 2000 and 1999......................... 26

Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999............................................. 27

Notes to Consolidated Financial Statements................................ 28-44

FINANCIAL STATEMENTS SCHEDULE:

Report of Independent Accountants......................................... 47

Schedule II - Valuation and Qualifying Accounts for the years
ended March 31, 2001, 2000 and 1999..................................... 48

All other schedules are omitted because they are not applicable

REPORT OF INDEPENDENT ACCOUNTANTS

To The Board of Directors and Shareholders of
e-dentist.com, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
e-dentist.com, Inc. and its Subsidiaries (the "Company") at March 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As described in Note 1 and Note 10, the terms of the Company's credit agreement
call for a principal maturity date of July 2, 2002. Management's current
projections indicate that the Company will have sufficient funds to meet its
operating capital requirements through fiscal year ending March 31, 2002;
however, there would not be sufficient cash flow to fund the credit agreement
obligations due at July 2, 2002. Management is currently seeking other financing
arrangements that would enable the Company to repay amounts outstanding under
the credit agreement before July 2, 2002. Absent the Company's ability to obtain
additional sources of funding or refinance its line of credit, it is unlikely
the Company would be able to pay the principal payment due on the credit
agreement on July 2, 2002, which could have a material and adverse effect on the
Company.

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona

June 22, 2001,
except for Notes 1 and 10, as to which the date is June 29, 2001

E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

MARCH 31, MARCH 31,
2001 2000
-------- --------

ASSETS
Current Assets:
Cash and cash equivalents ............................................. $ 1,051 $ 553
Receivables from Affiliated Practices, net of allowance
for doubtful accounts of $1,147 and $3,269, respectively ............. 195 2,966
Prepaid expenses and other current assets ............................. 128 499
Notes receivable from Affiliated Practices-current, net
of allowance for doubtful accounts of $323 and $427, respectively.... 261 421
-------- --------
Total current assets ............................................. 1,635 4,439

Property and equipment, net ........................................... 3,279 6,886
Intangible assets, net ................................................ 3,107 25,786
Notes receivable from Affiliated Practices, net of allowance
for doubtful accounts of $1,766 and $1,287, respectively ............ 1,059 709
Other assets .......................................................... 111 86
-------- --------
Total assets ..................................................... $ 9,191 $ 37,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Current portion of long term debt ..................................... $ 471 $ 492
Accounts payable and accrued liabilities .............................. 959 1,702
Current portion of deferred revenue ................................... 1,052 206
Accrued employment agreement .......................................... 248 400
Current portion of capital lease liabilities .......................... 345 309
-------- --------
Total current liabilities ........................................ 3,075 3,109

Long term debt, less current maturities ................................. 11,461 14,829
Capital lease liabilities ............................................... 643 961
Deferred revenue ........................................................ 666 --

Commitments and contingencies

Shareholders' equity (deficit):
Common stock, $.001 par value 40,000,000 shares authorized,
11,721,664 and 10,820,783 issued, respectively ....................... 12 11
Additional paid-in capital ............................................ 25,809 25,604
Accumulated deficit ................................................... (31,349) (6,432)
Less: Treasury shares at cost: 1,149,116, and 154,748,
respectively ........................................................ (1,126) (176)
-------- --------
Total shareholders' equity (deficit) ............................. (6,654) 19,007
-------- --------

Total liabilities and shareholders' equity (deficit) ............. $ 9,191 $ 37,906
======== ========

The accompanying notes are an integral part of the
consolidated financial statements

E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
-------- -------- --------

Net revenue ................................................................. $ 12,458 $ 56,988 $ 38,824
Operating expenses:
Clinical salaries, wages and benefits ..................................... 3,452 22,957 14,735
Dental supplies and lab fees .............................................. 285 10,134 7,133
Rent ...................................................................... 176 3,922 2,963
Advertising and marketing ................................................. 33 1,380 785
General and administrative ................................................ 7,340 10,586 4,497
Other operating expenses .................................................. 192 7,993 5,627
Impairment of assets ...................................................... 23,0000 -- --
Depreciation and amortization ............................................. 2,368 2,504 1,200
-------- -------- --------
Total operating expenses ............................................. 36,846 59,476 36,940
-------- -------- --------

Earnings (loss) from operations ............................................. (24,388) (2,488) 1,884

Interest expense ............................................................ 1,358 1,310 399
Interest income ............................................................. (352) (208) (188)
Other income ................................................................ (407) (93) (44)
-------- -------- --------
599 1,009 167

Income (loss) before income taxes and extraordinary item .................... (24,987) (3,497) 1,717
Income tax expense (benefit) ................................................ -- 2,213 (525)
-------- -------- --------

Income (loss) before extraordinary item ..................................... (24,987) (5,710) 2,242

Extraordinary item--gain on debt forgiveness (net of tax effect of $0)....... 70 350 --
-------- -------- --------

Net income (loss) .................................................... $(24,917) $ (5,360) $ 2,242
======== ======== ========
Basic and diluted earnings per share:
Earnings (loss) before extraordinary item ................................. $ (2.38) $ (0.55) $ 0.29
Extraordinary item ........................................................ .01 .03 --
-------- -------- --------
Net earnings (loss) ....................................................... $ (2.37) $ (0.52) $ 0.29
======== ======== ========

Weighted average number of shares outstanding--basic and diluted ............ 10,496 10,356 7,803
======== ======== ========

The accompanying notes are an integral part of the
consolidated financial statements

E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

COMMON ADDITIONAL TOTAL
------------------ PAID IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY (DEFICIT)
------ ------ ------- ------- ----- ----------------

Balances, April 1, 1998 ....................... 6,442 $ 6 $ 10,304 $ (3,314) $ $ 6,996

Issuance of common stock ...................... 375 1 2,870 -- -- 2,871
Issuance of common stock to Affiliated
Practices .................................... 2,286 2 8,494 -- -- 8,496
Tax benefit related to assets acquired in
affiliations.................................. -- -- 155 -- -- 155
Net income .................................... -- -- -- 2,242 -- 2,242
------ ----- -------- -------- -------- --------
Balances, March 31, 1999 ...................... 9,103 9 21,823 (1,072) 20,760

Issuance of common stock ...................... 1,893 2 3,836 -- 3,838
Shares repurchased ............................ (175) -- (297) -- (176) (473)
Issuance of options for compensation .......... -- -- 54 -- -- 54
Net loss ...................................... -- -- -- (5,360) -- (5,360)
Tax benefit related to assets acquired in
affiliations.................................. -- -- 188 -- -- 188
------ ----- -------- -------- -------- --------
Balances, March 31, 2000 ...................... 10,821 11 25,604 (6,432) (176) 19,007

Issuance of common stock ...................... 998 1 307 -- -- 308
Shares repurchased ............................ (97) -- (102) -- (950) (1,052)
Net loss ...................................... -- -- -- (24,917) -- (24,917)
------ ----- -------- -------- -------- --------
Balances, March 31, 2001 ...................... 11,722 $ 12 $ 25,809 $(31,349) $ (1,126) $ (6,654)
====== ===== ======== ======== ======== ========

The accompanying notes are an integral part of the
consolidated financial statements

E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
-------- -------- --------

Cash flows from operating activities:
Net income (loss) .................................................... $(24,917) $ (5,360) $ 2,242
Adjustment to net income (loss):
Provision for bad debts ............................................ 1,705 4,505 125
Impairment of assets ............................................... 23,000 -- --
Depreciation and amortization ...................................... 2,368 2,504 1,200
Stock options compensation ......................................... -- 54 --
Gain on debt forgiveness ........................................... (70) (350) --
Deferred income taxes (benefit) .................................... -- 2,161 (525)
Changes in operating assets and liabilities:
Receivables from Affiliated Practices ............................ 110 (2,383) (5,784)
Prepaid expenses and other current assets ........................ 111 (168) (364)
Other assets ..................................................... 75 -- --
Accounts payable and accrued liabilities ......................... (773) (1,401) (63)
Deferred revenue ................................................. (85) -- --
Accrued employment agreement ..................................... (152) (190) (310)
-------- -------- --------
Net cash provided by (used in) operating activities ........ 1,372 (628) (3,479)
-------- -------- --------
Cash flows from investing activities:
Repayment of notes receivable ...................................... 533 116 --
Capital expenditures ............................................... (138) (347) (1,424)
Acquisitions, net of cash acquired ................................. -- (472) (10,326)
Issuance of notes receivable ....................................... (24) (279) (1,257)
-------- -------- --------
Net cash provided by (used in) investing activities ........ 371 (982) (13,007)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common and redeemable preferred stock..... -- -- 2,930
Proceeds from line of credit ....................................... -- 2,100 8,000
Repayment of long-term debt ........................................ (1,245) (984) --
Offering and financing costs ....................................... -- -- (105)
-------- -------- --------
Net cash provided by (used in) financing activities ........ (1,245) 1,116 10,825
-------- -------- --------

Net change in cash and cash equivalents .................... 498 (494) (5,661)
Cash and cash equivalents, beginning of period ....................... 553 1,047 6,708
-------- -------- --------

Cash and cash equivalents, end of period ............................. $ 1,051 $ 553 $ 1,047
======== ======== ========

The accompanying notes are an integral part of the financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

RECENT EVENTS

As of March 31, 2001, all but one of the active Service Agreements have
been modified or terminated. As a result of the modifications and terminations
of the Service Agreements, the Company prepared an impairment analysis to
determine the recoverability of the Management Services Agreement intangible
assets and fixed assets grouped at the practice level. The Company prepared the
analysis by calculating the expected discounted future cash flows under modified
contracts less the carrying amount of the intangible asset and fixed assets to
determine the impairment charge. Based on the modified and terminated Service
Agreements, the Company recorded a charge due to impairment of approximately $23
million for the year ended March 31, 2001. The fair value of the remaining
intangible assets associated with the Service Agreements is being amortized over
the remaining term of the modified Service Agreements.

EXPANSION OF MODEL AND FOCUS

the Company created the e-Learning engine and LMS, which provides an integrated
solution for corporate clients. The Company's learning management system was
created to be a web based, low bandwidth, cross browser compatible content
delivery and data management system.

The Company's LMS delivers web enabled content through a series of server
side components. Because of its design, the interface can be optimized to use
less than 20K of bandwidth and can deliver any web-enabled content (from
documents and presentations to video.) The testing system is database enabled,
which provides the flexibility to create test questions according to testing
requirements. The system has the ability to provide multiple test environments
to meet user needs and questions that can be changed by the administrator.
Testing options include open book tests, closed book tests, timed tests, random
question tests, or smart tests (test questions by category or lessons that are
designed to identify skill weaknesses). Lessons and courses are designed with
pre and post tests and all testing activity is recorded into a database.

LIQUIDITY AND MANAGEMENT PLANS

As discussed in Note 10, at March 31, 2001, the Company was not in
compliance with certain of the financial covenants of the line of credit. At
March 31, 2001, $9.3 million was outstanding under the line of credit. In
conjunction with the extension discussed below, the bank has waived
non-compliance of certain financial ratios at March 31, 2001.

ORGANIZATION AND BASIS OF PRESENTATION

Pentegra Dental Group, Inc. (the "Company") together with its wholly owned
subsidiary, Pentegra Investments, Inc. ("PII"), provides practice management
services to dental practices throughout the United States. In July 1997,
Pentegra Dental Group, Inc., changed its name to Pentegra Investments, Inc. and
formed a new wholly owned subsidiary named Pentegra Dental Group, Inc.
("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the
Company's initial public offering, PII repurchased (the "Share Repurchase") from
the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per
share, that number of shares as was necessary so that the aggregate number of
shares of Pentegra Dental common stock, par value $.001 per share (the "Common

Stock"), issued in connection with the Affiliations (as defined below) and the
Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to
that agreement, PII repurchased 909,237 shares for $14,000 and exchanged on a
share-for-share basis, shares of PII common stock, par value $0.015 per share,
for 1,756,667 shares of Common Stock (the "Share Exchange"). On March 30, 1998,
Pentegra Dental acquired (the "Affiliations") simultaneously with the closing of
its initial public offering (the "Offering" or "IPO"), substantially all of the
tangible and intangible assets, and assumed the liabilities, of 50 dental
practices (collectively, the "Founding Affiliated Practices") in exchange for
3.1 million shares of Common Stock, $6.5 million in cash and net assets assumed
of approximately $300,000. The net proceeds of the 2.5 million shares of Common
Stock issued in the IPO (after deducting the underwriting discounts and
commissions) were $19.8 million. Total related offering costs were $3.4 million.

The acquisitions of the Founding Affiliated Practices have been accounted
for in accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 48, "Transfers of Non-monetary Assets by Promoters or
Shareholders". In accordance with SAB No. 48, the acquisition of the assets and
assumption of certain liabilities for all of the Founding Affiliated Practices
pursuant to the Affiliations has been accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock issued in
those transactions being valued at the historical cost of the non-monetary
assets acquired net of liabilities assumed. The cash consideration of
approximately $6.5 million, paid at closing on March 30, 1998, less net assets
acquired of approximately $300,000, is reflected as a dividend by the Company to
the owners of the Founding Affiliated Practices in the quarter ended March 31,
1998. SAB No. 48 is not applicable to any acquisitions made by the Company
subsequent to the IPO. Acquisitions of certain of the assets and liabilities of
practices that affiliate with the Company after the IPO have been accounted for
as purchases, and resulted in substantial annual non-cash amortization charges
for intangible assets in the Company's statements of operations.

In April 1998, the over allotment option to sell 375,000 shares of Common
Stock was exercised at a price of $8.50 per share, yielding additional net
proceeds to the Company of approximately $2.9 million.

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions are eliminated upon consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the various classes
of depreciable assets, ranging from three to seven years. Maintenance and
repairs are charged to expense whereas renewals and major replacements are
capitalized. Gains and losses from dispositions are included in operations.

INTANGIBLE ASSETS

The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocated the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
entered into a long-term Management Services Agreement with each affiliated
dental practice, which cannot be terminated individually by either party without
cause. The cost of the Management Services Agreement was originally being
amortized on a straight-line basis over the lessor of its term or 25 years. As
discussed in Note 1, the Management Services Agreements were modified during
fiscal 2001 and are now being amortized over the remaining term of the modified
Service Agreements (not more than five years).

In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
Management Services Agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional

dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the Management Services Agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and non-compete agreements with the dentist, or directly
contract with payors, the intangible asset created in the purchase allocation
process is associated primarily with the Management Services Agreement with the
affiliated dental practice.

The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amount of the asset
may not be recoverable, as determined based on the undiscounted cash flows of
the related operations over the remaining amortization period, the carrying
value of the asset is reduced to estimated fair value. Among the factors that
the Company will continually evaluate are unfavorable changes in each affiliated
dental practice's relative market share and local market competitive
environment, current period and forecasted operating results and cash flows of
the affiliated dental practice and its impact on the management fee earned by
the Company, and legal factors governing the practice of dentistry.

REVENUE RECOGNITION

Under the terms of the original Services Agreement with an Affiliated
Practice, the Company served as the exclusive manager and administrator of all
non-dental services relating to the operation of an Affiliated Practice. The
obligations of the Company included assuming responsibility for the operating
expenses incurred in connection with managing the dental centers. These expenses
included salaries, wages and related costs of non-dental personnel, dental
supplies and laboratory fees, rental and lease expenses, promotion and marketing
costs, management information systems and other operating expenses incurred at
the Affiliated Practices. In addition, the Company incurred general and
administrative expenses related to the financial and administrative management
of dental operations, insurance, training and development and other typical
corporate expenditures. As compensation for its services under the original
services agreement and subject to applicable law, the Company was paid a
management fee comprised of two components: (1) the costs incurred by it on
behalf of the Affiliated Practice, and (2) a management fee either fixed in
amount, an amount usually approximating 35% of the Affiliated Practice's
operating profit, before dentist compensation or 15% of the Affiliated
Practice's collected gross revenue ("Service Fee"). Therefore, net revenues
represented amounts earned by the Company under the terms of its Service
Agreements with the Affiliated Practices, which generally equated to the sum of
the Service Fees and the operating expenses that the Affiliated Practices paid
to the Company under the Service Agreements.

The Company has embarked upon a new strategy focusing on eCommerce and
e-Learning. Prior to the transition, the Company processed all payments to
vendors and employed the team members of Affiliated Practices. The modified
Management Services Agreements caused the team members to cease working as
employees for the Company and they became employees of the individual Affiliated
Practices. In addition, processing of payments to practice vendors is being
performed at the practice level, by practice employees. The Company is no longer
being reimbursed for expenses paid on the practices' behalf. As a result, the
components of net revenues have changed and decreased significantly with the new
Management Services Agreements.

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred taxes are determined based on differences between
the financial reporting and tax basis of assets and liabilities and are measured
using the enacted marginal tax rates currently in effect when the differences
reverse.

EARNINGS PER SHARE

Basic earnings per share are computed based upon the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. Diluted earnings per share are not separately presented because
such amounts would be the same as amounts computed for basic earnings per share.

As of March 31, 2001 and 2000, options to purchase 1,643,173 and 1,147,327
shares of Common Stock at exercise prices above the market value of Common Stock
were excluded from the calculation of earnings per share because their effect
would have been antidilutive. As of March 31, 2001 and 2000, shares of 266,180
and 559,656 convertible from the Company's convertible subordinated notes were
excluded from the calculation because their effects would have been
antidilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.

NEW PRONOUNCEMENTS

In March 2000, the Emerging Issue Task Force (EITF) reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2
states that for specific web site development costs, the accounting for such
costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The adoption of the pronouncement did not have an impact on the
Company's position or the results of the operations.

RECLASSIFICATIONS

Certain prior year balances in the consolidated financial statements have
been reclassified to confirm with the fiscal 2001 presentation.

3. NOTES RECEIVABLE

Notes receivable consisted of the following:

MARCH 31,
--------------------
2001 2000
------- -------
(IN THOUSANDS)
Notes receivable ................................. $ 3,409 $ 2,844
Less: allowance for doubtful accounts ............ (2,089) (1,714)
------- -------
1,320 1,130
Notes receivable, current ........................ 261 421
------- -------
$ 1,059 $ 709
======= =======

Notes receivables are with Affiliated Practices and are uncollateralized,
ranging in length from one to thirteen years. The notes bear interest at March
31, 2001 at fixed rates ranging from 5% to 10% with interest and principal
payments due monthly.

The collection schedule of notes receivable for each of the next five years
subsequent to March 31, 2001 were as follows (in thousands):

2002 ......................................................... $ 798
2003 ......................................................... 1,057
2004 ......................................................... 477
2005 ......................................................... 226
2006 ......................................................... 234
Thereafter ................................................... 617
------
$3,409
======

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

MARCH 31,
---------------------
2001 2000
------ ------
(IN THOUSANDS)
Furniture & Fixtures ............................. $1,447 $2,732
Equipment ........................................ 2,454 3,662
Computer Equipment ............................... 1,704 2,103
Leasehold Improvements ........................... 185 371
------ ------
Total property and equipment .................. 5,790 8,868
Less: accumulated depreciation ................... 2,511 1,982
------ ------
Property and equipment, net ................... $3,279 $6,886
====== ======

Depreciation expense for the years ended March 31, 2001 and 2000 was $1.1
million and $1.3 million, respectively.

5. INTANGIBLE ASSETS

Intangible assets consisted of the following:

MARCH 31,
-----------------------
2001 2000
------- -------
(IN THOUSANDS)
Management Services Agreements ................. $ 5,528 $26,905
Other .......................................... 286 504
------- -------
5,814 27,409
Less: accumulated amortization ................. 2,707 1,623
------- -------

Intangible assets, net ......................... $ 3,107 $25,786
======= =======

Amortization expense for the years ended March 31, 2001 and 2000 was $1.3
million and $1.2 million, respectively.

As discussed in Note 1, the Company modified the terms of its existing
Management Services Agreements. The Company recognized an impairment charge of
$23 million in fiscal 2001 related to the modifications.

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

MARCH 31,
-----------------
2001 2000
------ ------
(IN THOUSANDS)
Accounts payable trade ............................... $ 508 $1,111
Amounts payable to Affiliated Practices .............. -- 332
Accrued interest ..................................... 344 73
Other ................................................ 107 186
------ ------
Total accounts payable and accrued liabilities .... $ 959 $1,702
====== ======

7. DEFERRED REVENUE

Deferred revenue consisted of the following:

MARCH 31,
-----------------
2001 2000
------ ------
(IN THOUSANDS)
Deferred revenue, current ............................ $1,052 $ 206
Deferred revenue, noncurrent ......................... 666 --
------ ------
$1,718 $ 206
====== ======

Deferred revenue results primarily from Affiliated Practices prepaying
their future service fees with either cash payments or forgiveness of debt owed
to them by the Company.

During fiscal 2001 and 2000, the Company recorded deferred revenue from
cash payments of $563,000 and $100,000 and from canceling debt of $1,500,000 and
$59,000, respectively.

8. EXTRAORDINARY ITEM

In January 2001, former Liberty stockholders forgave $70,000 previously due
from the Liberty Merger Agreement (See Note 9).

In December 1999, a former member of the Board of Directors forgave
$350,000 previously due from the Company (See Note 15).

9. AFFILIATIONS

The following unaudited pro forma summary of financial information presents
the Company's combined results of operations as if the acquisition of Omega
Orthodontics, Inc. had occurred at the beginning of the periods presented, after

including the impact of certain adjustments including: (i) the elimination of
nonrecurring merger related costs, and (ii) reduced amortization expense
reflecting in value assigned to intangible assets, (in thousands, except per
share data).

FISCAL YEARS ENDED
MARCH 31,
-----------------------
2000 1999
--------- ---------
PRO FORMA PRO FORMA
UNAUDITED UNAUDITED
-------- --------
Revenues ........................................ $ 59,063 $ 46,645
Expenses ........................................ 61,752 44,216
-------- --------
Net income (loss) ............................... $ (2,689) $ 2,429
======== ========
Net income (loss) per basic and diluted
share before extraordinary item ................ $ (.26) $ 0.25
-------- --------
Weighted average number of basic and diluted
share outstanding .............................. 10,356 9,546
======== ========

The pro forma financial information presented does not purport to indicate
what the combined results of operations would have been had the merger occurred
at the beginning of the periods presented or the results of operations that may
be obtained in the future. Additionally, the pro forma financial information
presented does not reflect the anticipated cost savings resulted from the
integration of the Company's and Omega's operations.

ACQUISITION OF LIBERTY DENTAL ALLIANCE

For the year ended March 31, 1999, the Company completed new dentist
affiliations with 34 practices. Total consideration paid by the Company for the
new affiliations consisted of 2,286,000 shares of Common Stock, $4.6 million
aggregate principal amount of Convertible Subordinated Debt Securities, $537,000
in notes and $10.3 million of cash.

The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The aggregate purchase price and related
expenses that exceeded the fair market value of net assets, have been assigned
to Management Services Agreements. Management fees and related costs are
included in the financial statements from their acquisition dates. The
allocations were as follows (in thousands):

2000 1999
------- -------
Property and equipment, net ......................... $ 500 $ 1,955
Management services agreements ...................... 4,938 21,970
Deferred tax asset .................................. 1,212 --
Net liabilities acquired ............................ (2,340) --
------- -------
4,310 23,925
Less: Common stock issued ........................... 3,838 8,496
Less: Notes payable and convertible subordinated
notes issued ....................................... -- 5,103
------- -------
Cash purchase price ................................. $ 472 $10,326
======= =======

ASSET PURCHASE

On October 13, 2000, the Company entered into an Asset Purchase Agreement
with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000
shares of the Company's common stock with an additional 500,000 shares to be
held in escrow and paid contingent upon certain performance criteria of the
Company's common stock.

10. LONG-TERM DEBT

Long-term debt consisted of the following:

MARCH 31,
---------------------
2001 2000
------- -------
(IN THOUSANDS)
Credit facility ................................. $ 9,302 $10,100
Convertible subordinated notes, Series A ........ 1,812 3,546
Convertible subordinated notes, Series B ........ -- 288
Shareholders' notes payable ..................... 442 559
Notes payable ................................... 376 828
------- -------
11,932 15,321
Less: Current portion of long-term debt ........ 471 492
------- -------
Long-term debt .................................. $11,461 $14,829
======= =======

The credit facility provided the Company with a revolving line of credit of
up to $15.0 million, to be used for general corporate purposes including
financing of acquisitions, capital expenditures and working capital. The credit
facility bears interest at an adjustable rate based on LIBOR. At March 31, 2001
and 2000 the interest rate on outstanding amounts was 10.94% and 10.68%,
respectively. The credit facility is collateralized by liens on certain of the
Company's assets, including its rights under the Management Services Agreements
and accounts and notes receivable. The credit facility contains restrictions on
the incurrence of additional indebtedness and payment of dividends on the Common
Stock.

At March 31, 2001, the Company was not in compliance with certain of the
financial covenants of the line of credit. At March 31, 2001, $9.3 million was
outstanding under the line of credit. In connection with the extension discussed
below, the bank waived non-compliance of certain financial ratios at March 31,
2001.

The Convertible Subordinated Notes Series A Securities (Series A
Securities) were issued in connection with the acquisition of certain Affiliated
Practices. The Series A Securities bear interest at 6% and can be converted to
Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per
share. The conversion period began on November 1, 1999 and ends on November 1,
2003. The principal amount of the Series A Securities, if not converted, is
payable one-half on November 1, 2002 and one-half on November 1, 2003.

The Convertible Subordinated Notes Series B Securities (Series B
Securities) were issued in connection with the acquisition of certain Affiliated
Practices. The Series B Securities bear interest at 6% and can be converted to
Common Stock of the Company at a conversion price of $6.75 per share. The
conversion period began on April 1, 2000 and ends on April 1, 2004.

During fiscal 2001, $1,734,000 of previously issued Series A Securities and
$242,000 of the remaining Series B Securities, respectively, were returned by
the holders to offset amounts owed to the Company and prepay future service
fees. During fiscal 2000, $665,000 and $67,000 of previously issued Series A
Securities and Series B Securities, respectively, were returned by the holders
to offset amounts owed to the Company.

In connection with the merger with Omega Orthodontics, Inc., (see Note 9),
the Company assumed certain notes payable to Affiliated Practices. The notes
were originally issued in connection with the affiliation agreements at the time
the assets of the practices were acquired. At March 31, 2001 and 2000, the
remaining principal on these notes was $331,000 and $828,000, respectively.
During fiscal 2001, $355,000 of these notes were returned by the holders to
offset amounts owed to the Company and prepay future service fees. The notes are
due in monthly installments ranging from $1,213 to $4,860 through December 2003,
and bear interest at 8.5%.

In connection with the IPO; the Company issued $468,000 of notes payable to
certain shareholders formerly owning preferred stock. The notes bear 6% interest
and are payable on the earlier of March 30, 2003 or the date upon which the
Company offers and sells an amount of equity securities equal or greater to the
gross proceeds of the IPO. During fiscal 2001, $17,500 of these notes payable
were returned by the holders to offset amounts owned to the Company. During
fiscal 2000, the Company made a payment of $9,000 to the shareholders.

The Company entered into an agreement with an officer to purchase
substantially all the assets and the operations of Pentegra, Ltd. and Napili,
International for total consideration of $200,000, consisting of an aggregate of
$100,000 in cash and a $100,000 principal amount 9.0% promissory note. During
fiscal 2001, the $100,000 promissory note was transferred to deferred revenue
for payment of future management service fees.

In March 1999, the Company issued $537,000 of notes payable to owners of
affiliated dental practices. These notes were paid in April 1999.

The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to March 31, 2001 were as follows (in
thousands):

2002 ...................................................... $ 471
2003 ...................................................... 10,057
2004 ...................................................... 1,358
2005 ...................................................... 23
2006 ...................................................... 23
-------
$11,932
=======

11. CAPITALIZATION

PREFERRED STOCK

The Company has the authority to issue ten million shares of preferred
stock, par value $.001 per share. At March 31, 2001 and 2000 no shares of
preferred stock were issued or outstanding.

COMMON STOCK

As of March 31, 2001, the Company is authorized to issue forty million
shares of common stock.

The Company has acquired treasury stock from certain Affiliated Practices
for the payment of receivables and purchase of property and equipment.

12. INCOME TAXES

Significant components of the Company's deferred tax assets (liabilities)
were as follows (in thousands):

MARCH 31
--------------------
2001 2000
------- -------
Deferred tax assets:
Reserves for uncollectible accounts .............. $ 1,215 $ 1,931
Net operating loss carryforward .................. 8,665 2,472
Organizational costs ............................. 241 352
Property and equipment ........................... 56 --
Other ............................................ 7 26
------- -------
Total deferred tax assets ................... 10,184 4,781

Deferred tax liabilities:
Excess book basis over tax basis of accrued
revenues and expenses .......................... (591) (1,183)
Property and equipment ........................... -- (204)
Management services agreement .................... -- (155)
------- -------
Total deferred tax liabilities .............. (591) (1,542)

Net deferred tax asset ............................. 9,593 3,239
Less valuation allowance ......................... (9,593) (3,239)
------- -------
Net deferred tax asset ........................... $ -- $ --
------- -------
Less current portion ............................. -- --
------- -------
Noncurrent assets ................................ $ -- $ --
======= =======

Significant components of the provision for income taxes were as follows:

YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
------ ------ ------
Current tax expense (benefit):
Federal ............................... $ -- $ 52 $ --
State ................................. -- -- --
------ ------ ------
Total current .................... -- 52 --
Deferred tax expense (benefit):
Federal ............................... -- 1,984 (462)
State ................................. -- 177 (63)
------ ------ ------
Total deferred ................... -- 2,161 (525)
------ ------ ------
Expense (benefit) for income taxes ...... $ -- $2,213 $ (525)
====== ====== ======

The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows (in thousands):

YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Tax (benefit) at U.S. Statutory
rate (34%).............................. $(8,472) $(1,070) $ 584
State income taxes (benefit), net of
federal tax ............................ (1,012) (106) 82
Nondeductible expenses and other ........ 3,130 150 118
Change in valuation allowance ........... 6,354 3,239 (1,309)
------- ------- -------
Total tax expense (benefit) ...... $ -- $ 2,213 $ (525)
======= ======= =======

At March 31, 2001, the Company had net operating loss carry-forwards
available to reduce future taxable income of approximately $22.8 million,
expiring beginning in 2018. The Company recorded a valuation allowance for its
entire deferred tax asset because it concluded it is not likely it would be able
to recognize the tax assets due to the lack of operating history of its
implementation of the eBusiness plan. In addition, approximately $0.2 million of
the valuation allowance will be allocated to shareholder equity when that
portion of the deferred tax asset is recognized in the future. The Company also
has $6.1 million of available deductions related to the increase in tax basis of
the assets acquired in the Affiliations. The tax benefits will be recognized
over a period of seven to fifteen years.

13. STOCK OPTION PLANS

The Company grants stock options under the 1997 Stock Compensation Plan,
stock-based incentive compensation (the "Plan"). The Company recognizes
stock-based compensation issued to employees at the intrinsic value between the
exercise price of options granted and the fair value of stock for which the
options may be exercised. However, pro forma disclosures as if the Company
recognized stock-based compensation at the fair value of the options themselves
are presented below.

Under the Plan, the Company is authorized to issue 2,000,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options.

There were 1,643,173 and 1,147,327 options granted under the Plan, at March
31, 2001 and 2000, respectively. The Compensation Committee administers the
Plan. These stock options have contractual terms of 10 years and have an
exercise price no less than the fair market value of the stock at grant date.
The options vest at varying rates over a one to five year period.

Following is a summary of the status of the Company's stock options as of
March 31, 2001 and for the three years then ended:

NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
------- ------

Outstanding at April 1, 1998 ..................... 671,666 $8.50
---------- -----
Exercisable at April 1, 1998 ..................... -- --
---------- -----
Granted .......................................... 358,000 4.94
Exercised ........................................ -- --
Forfeited ........................................ (433,000) 8.46
Expired .......................................... -- --
---------- -----
Outstanding at March 31, 1999 .................... 596,666 6.40
---------- -----
Exercisable at March 31, 1999 .................... 136,333 6.69
---------- -----
Granted .......................................... 608,994 3.17
Exercised ........................................ -- --
Forfeited ........................................ (58,333) 7.06
Expired .......................................... -- --
---------- -----
Outstanding at March 31, 2000 .................... 1,147,327 4.74
---------- -----
Exercisable at March 31, 2000 .................... 267,263 6.41
---------- -----
Granted .......................................... 804,901 0.68
Exercised ........................................ --
Forfeited ........................................ (309,055) 5.76
Expired .......................................... --
---------- -----
Outstanding at March 31, 2001 .................... 1,643,173 2.50
---------- -----
Exercisable at March 31, 2001 .................... 488,749 4.08
---------- -----
Weighted average fair value of options granted
during the period:
Fiscal 1999 ................................... $2.77
Fiscal 2000 ................................... $1.00
Fiscal 2001 ................................... $0.26

The fair value of each stock option granted by the Company is estimated on
the date of grant using the Black-Scholes option pricing model for the three
years ended March 31, 2001 with the following weighted-average assumptions:
dividend yield of 0% for each year; expected volatility of 61.4% for the year
ended March 31, 1999, 67% for the year ended March 31, 2000 and 65% for the year
ended March 31, 2001; risk-free interest rates are 5.7% for the year ended March
31, 1999, 6.2% for the year ended March 31, 2000 and 4.93%-6.29% for the year
ended March 31, 2001; the expected average lives of the options range from seven
to ten years.

The following table summarizes information about stock options outstanding
at March 31, 2001:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE REMAINING
NUMBER OF AVERAGE CONTRACTUAL LIFE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE (YEARS) SHARES EXERCISE PRICE
------ -------------- ------- ------ --------------
(SHARE DATA IN THOUSANDS)

$0.01 $0.99 616,436 0.50 9.45 61,124 0.50
$1.00 $1.99 210,000 1.27 9.15 50,000 1.56
$2.00 $2.99 445,000 2.21 8.29 165,000 2.34
$3.00 $8.50 371,737 6.83 7.31 212,625 7.00
--------- ---------
1,643,173 488,749
========= =========

Had the compensation cost for the company's stock based compensation plans
been determined using the fair value rather than the intrinsic value of the
options, the Company's net income (loss) and diluted net income (loss) per share
for 2001, 2000 and 1999 would approximate $(24.9) million or $(2.37), $(5.4)
million or $(0.52) and $1.9 million, or $0.25 per share, respectively. The
effects of applying fair value accounting in this pro forma disclosure are not
indicative of future amounts.

WARRANTS

Omega Orthodontics, Inc. (See Note 9) had warrants outstanding to purchase
2,430,000 shares of Omega common stock. As a result of the merger with the
Company on July 1, 2000, these warrants now constitute warrants to acquire, on
the same terms and conditions as were applicable under the original Omega
warrants, 865,343 shares of the Company's common stock exercisable at prices
ranging from $18.53 to $27.80 per share.

14. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company leases a portion of its property and equipment under the terms
of capital and operating leases. The capital leases bear interest at varying
rates ranging from 8.9% to 12.6% and require monthly payments.

Assets recorded under capital leases, at March 31, 2001, consisted of the
following (in thousands):

Cost ........................................................... $1,190
Less accumulated amortization .................................. 330
------
Total .......................................................... $ 860
======

Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one or more years consisted
of the following at March 31, 2001 (in thousands):

CAPITAL OPERATING
------- ---------
2002 ................................................ $ 437 $ 378
2003 ................................................ 336 282
2004 ................................................ 277 167
2005 ................................................ 115 3
2006 ................................................ -- --
Thereafter .......................................... -- --
------ ------
Total minimum obligations ........................... $1,165 $ 830
======

Less amount representing interest ................ 177
------
Present value of minimum obligations ................ 988
Less current portion ............................. 345
------
Long-term obligation at March 31, 2001 .............. $ 643
======

The Company incurred rent expense of $253,000, $264,000 and $214,000 in
fiscal 2001, 2000 and 1999, respectively.

LITIGATION

Affiliated Practice and believes that it will recover any damages suffered from
the responsible Affiliated Practice.

15. RELATED PARTY TRANSACTIONS

An employment bonus of $1,250,000 to a member of the Board of Directors and
Chief Dental Officer of the Company was recorded prior to fiscal 1999. During
fiscal 2001, 2000 and 1999, $152,000, $190,000 and $310,000 was paid
respectively to this board member. In December 1999, the officer forgave
$350,000 due him by the Company. The net extraordinary gain to the Company after
a tax effect was $350,000. Pursuant to the terms of the Company's employment
agreement with the Chief Dental Officer as amended, the remaining employment
bonus must be paid in full by July 31, 2001. At March 31, 2001, $248,000
remained outstanding.

During the year ended March 31, 2001, the Company made a severance payment
of $64,000 to the former Chief Financial Officer. During the year ended March
31, 2000, the Company made a severance payment of $30,000 to the former Chief
Operating Officer. The Company also agreed to pay the former Chief Operating
Officer $72,000 under the terms of the separation. During the year ended March
31, 1999, the Company made a severance payment of $350,000 to the former Chief
Executive Officer.

During fiscal 2001, the Company recognized $10,000 of legal expense to a
law firm of which a member of the Company's Board of Directors is a partner.

At March 31, 2000 and 1999, the Company had notes and accounts receivable
from Affiliated Practices who also serve as members of the Board of Directors.
At March 31, 2000 and 1999, the total notes receivable from board members were
approximately $361,000 and $109,000 respectively, net of an allowance for
doubtful accounts of $136,000 and $0, respectively. The accounts receivable from
board members at March 31, 2000 and 1999 were approximately $430,000 and
$386,000 respectively, net of allowance for doubtful accounts of $198,000 and
$0, respectively.

16. CREDIT RISK

The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, receivables from
Affiliated Practices, and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings, and revolving line of credit and notes
receivables from Affiliated Practices as of March 31, 2001 and 2000, approximate
their fair value based on the Company's current incremental borrowing rates for
similar type of borrowing arrangements.

RECEIVABLES AND NOTES RECEIVABLES FROM AFFILIATED PRACTICES

Receivables from Affiliated Practices represents payment for services
rendered by the Company for the Affiliated Practices. The Company does not
perform periodic credit reports or provide collateral related to the receivables
from Affiliated Practices.

As of March 31, 2001 and 2000, the Company had on allowance for doubtful
accounts of $3.3 million and $5.0 million respectively, for its accounts and
notes receivables from Affiliated Practices. In the years ended March 31, 2001
and 2000, the Company recorded a $1.7 million and $4.5 million charge in bad
debt expense resulting from its inability to collect receivables from Affiliated
Practices after exhausting various payment plans with the Affiliated Practices
and settlement of litigation with certain practices. Although management
believes the remaining receivables are collectable at March 31, 2001, it is
reasonably possible that what the Company will collect may materially differ.

During the years ended March 31, 2001 and 2000, the Company converted
approximately $1.9 million and $971,000 in receivables from Affiliated Practices
into interest bearing notes receivables.

17. SUPPLEMENTAL CASH FLOW INFORMATION

YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2001 2000 1999
------ ------ ------
(IN THOUSANDS)

Cash paid during the period for:
Interest ............................................................... $1,088 $1,571 $ 55
Income taxes ........................................................... -- -- 85
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in connection with acquisitions ............... 308 3,838 8,496
Issuance of convertible subordinated notes in connection
with practice affiliations ........................................... -- -- 4,566
Issuance of notes payable in connection with practice
affiliations ......................................................... -- -- 537
Convertible subordinated notes offset against receivables
from Affiliated Practices ............................................ 808 732 --
Conversion of receivables from Affiliated Practices to notes
receivables .......................................................... 1,911 971 --
Capital leases incurred for equipment .................................. 22 1,448 --
Treasury stock acquired for payment of receivable from Affiliated
Practices and purchase of property and equipment ..................... 1,052 473 --
Notes payable offset against future management service fees ............ 1,500 -- --

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth summary quarterly results of operations for
the Company for the years ended March 31, 2001 and 2000:

FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- -------

Net revenue ......................................... $ 6,357 $ 2,210 $ 1,966 $ 1,925
Operating expenses .................................. 11,539 21,972 1,479 1,856
Earnings (loss) from operations ..................... (5,182) (19,762) 487 69
Earnings (loss) before income taxes ................. (5,508) (19,973) 266 228
Income taxes ........................................ -- -- -- --
Extraordinary items, net ............................ -- -- -- 70
Net (loss) earnings ................................. $ (5,508) $(19,973) $ 266 $ 298
Net earnings (loss) per share:(1)
Earnings (loss) before extraordinary item ......... $ (.54) $ (2.00) $ .03 $ .02
Extraordinary item ................................ -- -- -- .01
Net earnings (loss) ............................... $ (.54) $ (2.00) $ .03 $ .03
Weighted average common shares outstanding:
Basic and diluted ................................. 10,175 9,969 10,463 10,630

FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- -------
Net revenue ......................................... $ 12,449 $ 15,609 $ 14,967 $ 13,963
Operating expenses .................................. 11,544 14,920 14,761 18,251
Earnings (loss) from operations ..................... 905 689 206 (4,288)
Earnings (loss) before income taxes ................. 698 525 8 (4,728)
Income taxes ........................................ 279 250 49 1,635
Extraordinary items, net ............................ 217 133
Net (loss) earnings ................................. $ 419 $ 275 $ 176 $ (6,230)
Net earnings (loss) per share:(1)
Basic and diluted earnings per share
Earnings (loss) before extraordinary item........ $ .05 $ .03 $ -- $ (.60)
Extraordinary item .............................. -- -- .02 .01
Net earnings (loss) ............................. $ .05 $ .03 $ .02 $ (0.58)
Weighted average common share outstanding:
Basic and diluted ................................. 9,103 10,844 10,802 10,675

----------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share dues not
equal the total computed for the year due to stock transactions that
occurred.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is set forth under the captions
"Election of Directors" and "Section 16 Reports" will be set forth in the
Company's definitive Proxy Statement (the "2001 Proxy Statement") for its 2001
annual meeting of stockholders, which sections are incorporated herein by
reference.

Pursuant to Item 401 (b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in Part
I of this Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth in the section
entitled "Executive Compensation" in the 2001 Proxy Statement, which section is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
2001 Proxy Statement, which section is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED THIRD PARTY TRANSACTIONS

The information required by this item will be set forth in the section
entitled "Certain Transactions" in the 2001 Proxy Statement, which section is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

Report of Independent Accountants

Consolidated Balance Sheets as of March 31, 2001 and 2000

Consolidated Statements of Operations for the Years Ended March 31,
2001, 2000 and 1999.

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended March 31, 2001, 2000 and 1999.

Consolidated Statements of Cash Flows for the Years Ended March 31,
2001, 2000 and 1999.

Notes to the Consolidated Financial Statements

(a)(2) FINANCIAL STATEMENT SCHEDULES

Report of Independent Accountants

The following financial statement schedule is filed as a part of this
Report under Schedule II on page 48. Schedule II -- Valuation and
Qualifying Accounts for the three fiscal years ended March 31, 2001.
All other schedules called for by Form 10-K are omitted because they
are inapplicable or the required information is shown in the financial
statements, or notes thereto, included herein.

(a)(3) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------

3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
3.2(1) Bylaws of Pentegra Dental Group, Inc.
3.3 Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
3.4 Amendment of Bylaws of Pentegra Dental Group, Inc.
4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra
Dental Group, Inc.
4.2(1) Form of Registration Rights Agreement for Owners of Founding
Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between
Pentegra Dental Group, Inc. and the stockholders named therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices
4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust
Company of Texas, N.A., as Trustee relating to the Convertible Debt
Securities
4.6 Form of certificate evidencing ownership of Common Stock of
e-dentist.com, Inc.
+10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
+10.2(1) Form of Service Agreement
10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A.
and Pentegra Dental Group, Inc.
10.4(5) Modification to Credit Agreement between Pentegra Dental Group, Inc.
and Bank One, Texas, N.A. dated September 9, 1998
10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc.,
Liberty Dental Alliance, Inc., Liberty Acquisition Corporation,
James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as
of November 13, 1998
10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999
10.7(2) First Amendment to the Agreement and Plan of Merger by and among
Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty
Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister
and William Kelly dated as of January 29, 1999
10.8(6) Third Amendment to Credit Agreement
+10.9 Employment Agreement dated November 12, 2000 between e-dentist.com
and James M. Powers, Jr.
+10.10 Employment Agreement dated February 15, 2001 between e-dentist.com
and Charles Sanders
+10.11 Employment Agreement dated February 15, 2001 between e-dentist.com
and James Dunn, Jr.
+10.12 Employment Agreement dated July 16, 2000 between e-dentist.com and
Glenn J. Bonagura
10.13 Asset Purchase Agreement by and among e-dentist.com, Inc. and
Dexpo.com, Inc.
10.14 Fourth Amendment of Credit Agreement
12 Ratio of Earnings to Fixed Changes
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP

----------
(1) Previously filed as an exhibit to e-dentist.com's Registration Statement on
Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to e-dentist.com's Registration Statement on
Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to e-dentist.com's Registration Statement on
Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to e-dentist.com's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(5) Previously filed as an exhibit to e-dentist.com's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to e-dentist.com's Annual Report on Form
10-K for the year ended March 31, 2000.

+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.

(b) NO CURRENT REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER
2001.

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders of
e-dentist.com Inc. and Subsidiaries:

Our audits of the consolidated financial statements referred to in our report
dated June 22, 2001 except for Note 1 and Note 10 as to which the date is June
29, 2001 appearing in the 2001Annual Report to Shareholders of e-dentist.com,
Inc. (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona
June 22, 2001

E-DENTIST.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II

ADDITIONS
-----------------------
BALANCE AT THE CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT
FISCAL BEGINNING OF BAD DEBT OTHER CHARGED TO END OF
YEAR DESCRIPTION PERIOD EXPENSE ACCOUNTS ALLOWANCE PERIOD
---- ----------- ------ ------- -------- --------- ------

2001 Receivables from Affiliated
Practices-allowance for doubtful
accounts......................... $ 3,269 $ 1,172 $ -- $ 3,294 $ 1,147

2000 Receivables from Affiliated
Practices-allowance for doubtful
accounts......................... $ 125 $ 3,244 $ -- $ 100 3,269

1999 Receivables from Affiliated
Practices-allowance for doubtful
accounts......................... $ -- $ 125 $ -- $ -- 125

2001 Notes receivable-allowance for
doubtful accounts................ $ 1,714 $ 533 $ -- $ 158 2,089

2000 Notes receivable-allowance for
doubtful accounts................ $ -- $ 1,261 $ 453(a) $ -- 1,714

1999 Notes receivable-allowance for
doubtful accounts............... $ -- $ -- $ -- $ -- --

(a) Relates to the allowance for doubtful accounts that was recorded as for the
Omega acquisition.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of
Phoenix, State of Arizona, on July 5, 2001.

e-dentist.com, Inc.

By: /s/ James M. Powers, Jr., D.D.S.
-------------------------------------
James M. Powers, Jr., D.D.S.
Chairman of the Board, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

NAME CAPACITY DATE
---- -------- ----

/s/ James M. Powers, Jr., D.D.S. Chairman of the Board, July 5, 2001
-------------------------------- President and Chief
James M. Powers, Jr., D.D.S. Executive Officer (Principal
Executive Officer)

/s/ James H. Collins Director July 5, 2001
--------------------------------
James H. Collins

/s/ David A. Little, D.D.S. Director July 5, 2001
--------------------------------
David A. Little, D.D.S.

/s/ Daniel T. Robinson, Jr. Director July 5, 2001
--------------------------------
Daniel T. Robinson, Jr.

/s/ George M. Siegel Director July 5, 2001
--------------------------------
George M. Siegel