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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                 _____________

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 2001

                                      OR

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

                For the transition period from               to
                        Commission File Number: 1-13263

                          CASTLE DENTAL CENTERS, INC.

                                   Delaware
        (State or other jurisdiction of incorporation or organization)

                                   76-0486898
                     (I.R.S. Employer Identification No.)

                          3701 Kirby Drive, Suite 550
                                Houston, Texas
                   (Address of principal executive offices)

                                     77098
                                  (Zip Code)

                                (713) 490-8400
             (Registrant's telephone number, including area code)

       Securities Registered Pursuant to Section 12(b) of the Act:  None
          Securities Registered Pursuant to Section 12(g) of the Act:
                         Common Stock, $.001 Par Value
                               (Title of Class)

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

     Indicate by check mark if the 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 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. [X]

     As of March 31, 2002, there were 6,417,206 shares of Castle Dental Centers,
Inc. Common Stock, $.001 par value, issued and outstanding, of which 3,293,363,
having an aggregate market value of approximately $0.3 million, were held by
non-affiliates of the registrant.

     Documents Incorporated by Reference:  None

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                               TABLE OF CONTENTS
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Item 1.     Business...............................................................     1
            The Company............................................................     1
            Recent Developments....................................................     1
            The Dental Industry....................................................     3
            Business Strategy......................................................     3
            Dental Network Development.............................................     4
            Management Services Agreement..........................................     5
            Dentist Employment Agreements..........................................     5
            Services...............................................................     6
            Operations.............................................................     6
            Sales and Marketing....................................................     7
            Managed Care Contracts.................................................     7
            Competition............................................................     8
            Management Information Systems.........................................     8
            Regulation.............................................................     9
            Employees..............................................................    10
            Corporate Liability and Insurance......................................    11
Item 2.     Properties.............................................................    11
Item 3.     Legal Proceedings......................................................    11
Item 4.     Submission of Matters to a Vote of Security Holders....................    12
Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters..    13
Item 6      Selected Financial Data................................................    14
Item 7.     Management's Discussion and Analysis of Financial Condition and Results
            of Operations..........................................................    15
            Introduction...........................................................    15
            Components of Revenues and Expenses....................................    15
            Results of Operations..................................................    16
            Liquidity and Capital Resources........................................    20
            Critical Accounting Issues.............................................    22
            Inflation..............................................................    24
            Recent Accounting Pronouncements.......................................    24
Item 7A.    Quantitative And Qualitative Disclosures About Market Risk.............    24
Item 8.     Financial Statements and Supplementary Data............................    24
Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure...................................................    24
Item 10.    Directors and Executive Officers of the Registrant.....................    25
Item 11.    Executive Compensation.................................................    27
Item 12.    Security Ownership of Certain Beneficial Owners and Management.........    29
Item 13.    Certain Relationships and Related Transactions.........................    30
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K........    32
</TABLE>
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                      NOTE ON FORWARD-LOOKING STATEMENTS

    This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K are forward-looking
statements. When used in this document, the words, "anticipate," "believe,"
"estimate" and "expect" and similar expressions are intended to identify such
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and are subject to certain uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from expectations ("Cautionary Statements") are disclosed in this
Form 10-K, including without limitation in conjunction with the forward-looking
statements included in this Form 10-K. Should one or more of these uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from expectations. All subsequent written and oral forward-
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the Cautionary Statements.

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Item 1.  Business

The Company

     The Company manages and operates integrated dental networks through
contractual affiliations with general, orthodontic and multi-specialty dental
practices in the United States. The Company currently conducts operations in the
states of Texas, Florida, Tennessee and California. The Company does not engage
in the practice of dentistry but rather establishes integrated dental networks
by entering into management services agreements with affiliated dental practices
to provide, on an exclusive basis, management and administrative services to
affiliated dental practices. The Company seeks to achieve operating efficiencies
by consolidating and integrating affiliated practices into regional networks,
realizing economies of scale in such areas as marketing, administration and
purchasing and enhancing the revenues of its affiliated dental practices by
increasing both patient visits and the range of specialty services offered. As
of December 31, 2001, the Company provided management services to 88 dental
centers with approximately 190 affiliated dentists, orthodontists and other
dental specialists.

     The Company's objective is to make each of its dental networks the leading
group dental care provider in each market it serves. Since its formation, the
Company has applied traditional retail principles of business and marketing
techniques to the practice of dentistry, including locating practices in high-
profile locations, offering more affordable fees and payment plans, expanding
the range of services offered, increasing market share through targeted
advertising and offering extended office hours. By using the Castle Dental
Centers' approach to managing affiliated dental practices, the Company believes
it enables affiliated dentists, orthodontists and other dental specialists to
focus on delivering quality patient care and realize significantly greater
productivity than traditional individual and small-group dental practices.

     The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payers and intends
to continue to pursue managed care contracts. The Company negotiates capitated
managed care contracts on behalf of its affiliated dental practices, which
maintained an aggregate of 41 capitated managed care contracts covering
approximately 172,000 members at December 31, 2001.  The Company believes that
the continued development of its networks will assist it in negotiating national
and regional capitated arrangements with managed care payors on behalf of the
affiliated practices.

     The Company intends to establish a consistent national identity for its
business by implementing common practice management policies and procedures in
all of its dental centers and affiliated dental practices nationwide. Moreover,
the Company believes that its experience and expertise in managing multi-
specialty dental group practices, as well as the development of name recognition
associated with the name "Castle Dental Centers" will provide its affiliated
dental practices with a competitive advantage in attracting and retaining
patients and realizing practice efficiencies.

     The Company was formed in 1981 as a single location, multi-specialty dental
practice in Houston, Texas. From 1982 through 1996, the Company expanded to a
total of 10 locations with 39 dentists in the Houston metropolitan area. During
this period the Company developed, implemented and refined the integrated dental
network approach that it utilized as a basis for its expansion.  In the period
from 1996 through the first half of 2000, the Company expanded through the
acquisition of dental practices and the development of new ("de novo") dental
centers in its markets.  Practices were acquired in Tennessee, Florida, Austin,
Fort Worth and San Antonio in Texas, and in Los Angeles, California.  A total of
33 de novo dental centers were opened during this period while 8 dental centers
were closed or consolidated in 1999 and 2000.   In 2001, as part of its
restructuring and cost reduction program, the Company closed or consolidated an
additional 10 dental centers, 6 of which were de novo centers that had been
built in 1998 and 1999.  At December 31, 2001, the Company operated 58, 10, 15
and 5 dental centers in Texas, Tennessee, Florida and California, respectively.

Recent Developments

     The Company has been in default of its senior bank credit agreement (the
"Credit Agreement"), its senior subordinated note agreement ("Subordinated Note
Agreement") and a subordinated convertible note agreement ("Convertible Note
Agreement" and, together with the Credit Agreement and Subordinated Note

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Agreement, the "Debt Agreements") since June 2000.

     On February 15, 2001, the Company retained Getzler and Co., a New York
based turnaround specialist, to assist the Company in addressing its operational
issues and restructuring of the Company's debt. The Company's board of directors
appointed Getzler's designee, Ira Glazer, to serve as the Company's interim
Chief Executive Officer and initiated an executive search for a permanent Chief
Executive Officer. The Company's President and Chief Operating Officer resigned
to pursue other opportunities. Jack Castle, Jr., the Company's former Chief
Executive Officer, continued to serve as the Chairman of the Board until July 1,
2001.  On July 1, 2001, the Company hired James M. Usdan as its President and
Chief Executive Officer to replace Mr. Glazer.  Mr. Usdan was also appointed to
Castle Dental's board of directors.  On January 15, 2002, the Company hired
Joseph P. Keane as its Chief Financial Officer.  John M. Slack, the former Chief
Financial Officer remains as Vice President - Chief Administrative Officer.
Elizabeth A. Tilney, Jack H. Castle, D.D.S. and Jack H. Castle, Jr. resigned
from the Board of Directors of the Company on February 1, 2001, July 1, 2001 and
April 8, 2002, respectively.

     The Company has continued to pay interest (other than default interest) on
the amounts outstanding under the Credit Agreement, but has not made scheduled
principal payments of $11.3 under the Credit Agreement, nor made interest or
principal payments of $5.8 million owed to subordinated creditors since July
2000. During the last half of 2001, the Company negotiated with its creditors
and an unrelated third party concerning a potential equity investment and the
restructuring of the bank credit facility, the subordinated notes and other
Company debt. However, due to the deterioration in operating results in the
fourth quarter 2001, the discussions concerning the potential equity investment
were terminated in January 2002 and the Company has continued negotiations with
the senior and subordinated lenders concerning a forbearance agreement or a
restructuring of the Company's debt. However, these negotiations have not
resulted in a forbearance agreement or restructuring of the debt as of April 15,
2002. There can be no assurance that the Company's lenders will consent to the
restructuring necessary to allow the Company to continue to operate. If the
Company and its lenders cannot reach an agreement, it may be necessary for the
Company to seek protection under Chapter 11 of the Bankruptcy Code. These
factors, among others, may indicate that the Company will be unable to continue
as a going concern for a reasonable period of time.

     During 2001, the Company implemented a plan to allow it to continue to
operate without the need for additional borrowings. Components of this plan
included: (i) reorganization of field management to improve efficiency and
reduce regional overhead costs; (ii) reduction in corporate general and
administrative costs through job eliminations and reduction in other overhead
expenses; (iii) closing of unprofitable and under-performing dental centers;
(iv) realignment of accounts receivable management to focus on improved
collection of insurance and patient receivables; (v) restructuring of
compensation for management to emphasize performance-based incentives; and, (vi)
cancellation of further de novo development and reducing capital expenditures to
maintenance levels. While the plan resulted in lower operating costs during the
last half of the year, patient revenues were adversely affected by slower
general economic activity in the second half of 2001, the negative impact on
retail sales caused by the tragic events of September 11, and higher than
anticipated attrition of dentists during the year. This resulted in lower than
anticipated patient revenues, particularly in the fourth quarter 2001, that
resulted in operating losses and severely reduced cash flows.

     For 2002, the Company plans to focus on: (i) increased hiring of new
dentists and improving dentist retention; (ii) continuing to monitor and close
unprofitable and under performing dental centers; (iii) refurbishing and
modernizing existing dental centers within capital expenditure constraints of
$1.5 million; (iv) upgrading dental office management personnel; and (v)
improving patient services in order to increase patient retention rates.

     However, there can be no assurance that these efforts will improve
operating results or that cash flows will be sufficient to allow the Company to
meet its obligations in a timely manner. Therefore, there is substantial doubt
about the Company's ability to continue in existence.

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The Dental Industry

     Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. According to the American Dental Association 1999 Survey of
Dental Practice ("ADA Survey"), there were approximately 152,000 actively
practicing dental professionals in the U.S., of which approximately 8,900 were
practicing orthodontists. Nearly 85% of the nation's private practitioners work
either as sole practitioners or in a practice with one other dentist. The
balance of these dentists practice in about 5,000 groups of three or more
dentists. However, dental, orthodontic and other specialty practices have
followed the trend of the health care industry generally and are increasingly
forming larger group practices.

     The annual aggregate domestic market for dental services was estimated by
the Health Care Financing Administration, Health Care Financing Review (1999) to
be approximately $65.4 billion for 2001, and is projected to reach $109 billion
by 2010. Within the total market for dental services in the United States, there
are, in addition to general dentistry, a number of specialties, including
orthodontics (the straightening of teeth and remedy of occlusion), periodontics
(gum care), endodontics (root canal therapy), oral surgery (tooth extraction)
and pedodontics (care of children's teeth). The dental services market has grown
at a compound annual growth rate of approximately 8% from 1980 to 2000, and is
projected to grow at a compound annual growth rate of approximately 6% through
the year 2010. In contrast to other health care expenditures, dental services
are primarily paid for by the patient. According to the U.S. Department of
Health and Human Services, in 1998, consumer out-of-pocket expenditures
accounted for 48% of the payment for dental services, compared to 16% for other
medical services.

     Management believes that the growth in the dental industry has largely been
driven by four factors: (i) an increase in the availability and types of dental
insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic; and (iv) an increased focus on preventive and cosmetic dentistry.

     Concerns over the accelerating cost of health care have resulted in the
increasing importance of various forms of insurance coverage in the dental
industry. The National Association of Dental Plans ("NADP") estimates that 153
million people, or 56% of the U.S. population was covered by some form of dental
care plan in 1999, compared to 47% of the population that had dental insurance
in 1995. These insurance plans include indemnity insurance, preferred provider
("PPO") plans and capitated managed care plans.  Patients covered by indemnity
insurance plans typically are charged the same fees for dental services that are
charged to uninsured patients.  Under a PPO plan, the dentist charges a
discounted fee for each service based on a fee schedule negotiated with the
insurance provider.  Capitated managed care plans provide a fixed monthly fee
for each enrolled member that selects the dentist as his or her dental care
provider, plus supplemental or patient co-payments based on the type of service
provided. According to the NADP, of the estimated 153 million people covered by
dental benefits in 1999, approximately 43% were covered by indemnity plans, 39%
were covered by PPO plans and 18% were enrolled in capitated managed care
programs.

Business Strategy

     The Company's strategy is to develop integrated networks for the provision
of a broad range of dental services that provide high-quality, cost-effective
dental care in target markets. Key elements of this strategy are to:

          Provide High-Quality, Comprehensive, One-Stop Family Dental Health
     Care. The prototypical Castle Dental Center provides general dentistry as
     well as a full range of dental specialties (including orthodontics,
     pedodontics, periodontics, endodontics, oral surgery and implantology),
     thereby allowing the majority of specialty referrals to remain in-house
     within the Company's network of facilities. By bringing together multi-
     specialty dental services within a single practice, the Company is able to
     realize operating efficiencies and economies of scale and to promote
     increased productivity, higher utilization of professionals and facilities,
     and the sharing of dental specialists among multiple locations. The
     Company's practice model also incorporates quality assurance and quality
     control programs, including peer review and continuing education and
     technique enhancement. The Company believes that its multi-

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     specialty strategy differentiates it from both individual and multi-center
     practices that typically offer only general dentistry, orthodontics or
     other single specialty dental services.

          Develop Comprehensive Dental Networks in Target Markets. The Company
     seeks to consolidate and integrate its affiliated practices to establish
     regional dental care networks. The Company believes this network system
     will enable it to reduce the operating costs of its affiliated practices by
     centralizing certain functions such as telemarketing and advertising,
     billing and collections, payroll and accounting and by negotiating regional
     and national contracts for supplies, equipment, services and insurance.
     Once practice affiliations are established in a market, the Company seeks
     to assist the affiliated practices in expanding their range of services to
     make available specialty dental services not previously offered.

          Apply Traditional Retail Principles of Business to Dental Care. The
     Company believes it can enhance revenues and profitability by applying
     traditional retail principles of business to the provision of dental
     services in its target markets. These principles include professionally
     produced broadcast and print advertisements targeting specific audiences,
     and extended hours of operation which are convenient for patients,
     including weekend and evening hours. As part of its retail-oriented
     strategy, the Company seeks to establish or, where appropriate, relocate
     each Castle Dental Center in a convenient location in or near a high-
     profile neighborhood retail area and utilizes innovative sales and
     marketing programs designed to create strong name recognition and increase
     patient visits. In addition, the Company stresses the breadth and
     affordability of its services and works closely with patients to establish
     treatment schedules and affordable payment plans tailored to the patients'
     needs.

Dental Network Development

     Prior to 1999, the Company expanded into new markets through the
acquisition of multi-location group dental practices. Once the market entry
acquisition was made, the Company expanded within its target markets primarily
through the de novo development of new dental centers. During 1999 and 2000, the
Company expanded solely through the development of de novo centers and did not
complete any acquisitions of dental practices. In 2000, four de novo dental
centers were opened, four dental centers were closed and two dental centers in
Houston were consolidated into a new dental center. The Company developed no new
dental centers in 2001 and has no plans to develop any de novo dental centers in
2002. In 2001, as part of its restructuring and cost reduction program, the
Company closed or consolidated 10 unprofitable or under performing dental
centers, 6 of which were de novo centers that had been built in 1998 and 1999.

De novo Development

     The Company has opened 33 newly developed dental centers since 1997; seven
in Houston, four in Austin, five in Dallas/Fort Worth, five in San Antonio, two
in Corpus Christi, Texas, seven in Nashville, Tennessee and three in the
Tampa/Clearwater area in Florida. All of the new centers were located in leased
facilities in neighborhood retail shopping centers areas. Development of each de
novo dental center cost approximately $315,000 in leasehold improvements,
signage, and dental and office equipment, depending primarily on the size of the
dental facility. All new dental centers in the Company's existing markets
utilize the Castle Dental Centers name and logo. Six of the de novo dental
centers were closed in 2001 as part of the restructuring and cost reduction
program that was implemented in the first quarter of that year. The Company is
continually monitoring the performance of all its dental centers to determine if
additional closings will be necessary.

     The Company expanded through development of de novo dental centers in
existing markets because management believes that opening new dental centers
that conform to the Company's operating model is more effective in creating
brand awareness and increasing market share in existing markets than acquiring
dental practices that have different operating characteristics. In addition, the
cost of building and equipping a new dental center has generally been less than
the cost of acquiring dental centers. Due to the lack of capital necessary for
continued expansion, the Company ceased development of new dental centers in
early 2000, and did not have any centers under construction at December 31,
2001. Until the Company's liquidity improves, the Company anticipates that it
will not open or acquire any additional dental centers, although the Company may
refurbish or relocate existing dental centers based on the availability of
capital to do so.

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Management Services Agreement

     The Company has entered into a management services agreement with each of
its affiliated dental practices pursuant to which the Company becomes the
exclusive manager and administrator of all non-dental services relating to the
operation of the practice. The amount of the management fee charged by the
Company to an affiliated dental practice is intended to reflect and is based on
the fair value of the management services rendered by the Company to the
affiliated dental practice. Subject to applicable law, the Company is paid a
monthly management fee comprised of three components: (i) the costs incurred by
it on behalf of the affiliated practice; (ii) a base management fee in an amount
ranging from 12.5% to 20.0% of adjusted gross revenues; and (iii) a performance
fee equal to the patient revenues of the affiliated dental practice less (a) the
expenses of the affiliated dental practice and (b) the sum of (i) and (ii), as
described in each agreement. In California, the Company is paid a monthly
management fee comprised of two components: (i) the costs incurred by it on
behalf of the affiliated practice and (ii) a management fee in an amount ranging
from 15.0% to 30.0% of net patient revenues. With respect to three of the
California professional corporations, the Company is paid a bonus equal to 30%
of patient revenues in excess of average monthly patient revenues over the prior
two-year period. The amount of the management fee is reviewed by the Company and
the affiliated dental practice not less frequently than annually in order to
determine whether such fee should be adjusted, up or down, to continue to
reflect the fair value of the management services rendered by the Company.

     The obligations of the Company under its management services agreements
include assuming financial and other responsibility, for the following (subject
to limitations imposed by applicable state law): facilities, equipment and
supplies; advertising, marketing and sales; training and development; operations
management; provision of support services; risk management and utilization
review; application and maintenance of applicable local licenses and permits;
negotiation of contracts between the affiliated dental practice and third
parties, including third-party payors, alternative delivery systems and
purchasers of group health care services; establishing and maintaining billing
and collection policies and procedures; fiscal matters, such as annual
budgeting, maintaining financial and accounting records, and arranging for the
preparation of tax returns; and maintaining insurance. The Company does not
assume any authority, responsibility, supervision or control over the provision
of dental services to patients or for diagnosis, treatment, procedure or other
health care services, or the administration of any drugs used in connection with
any dental practice.

     The typical management services agreement is for an initial term of 25 to
40 years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. As part of the management services agreement, the Company requires that
the majority shareholder of the affiliated dental practice execute an option
agreement that grants the Company's designee the right to acquire all the
shareholder's interest in the practice at a nominal cost. Upon the occurrence of
certain events, the Company can exercise the option at any time with 10 days
written notice. The Company may nominate without restriction any licensed
dentist as its designee and may transfer the option at any time to any qualified
person, subject to applicable state regulations governing the practice of
dentistry. The management services agreement does not limit the number of times
that the option may be exercised. At December 31, 2001, each of the Company's
affiliated dental practices was wholly owned by an individual dentist.
Additionally, the management services agreement may be terminated by the Company
or the affiliated dental practice only in the event of default in the
performance of the material duties of the non-terminating party.

Dentist Employment Agreements

     Each affiliated dental practice has entered into employment agreements with
substantially all of its full-time dentists, orthodontists and other dental
specialists. Although the form of contract varies somewhat among practices and
among dentists with different specialties, the typical contract for a full-time
dentist provides for a defined compensation arrangement, including performance-
based compensation and, where market conditions permit and to the extent deemed
enforceable under applicable law, a covenant not to compete. Each full-time
dentist, whether or not a party to a dentist employment agreement, is required
to maintain professional liability insurance, and mandated coverage limits are
generally at least $1.0 million per claim and $3.0 million in the aggregate. In
addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability

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insurance in specified amounts. Certain part-time dentists retained by some of
the affiliated dental practices are independent contractors and have entered
into independent contractor agreements.

Services

     The Company provides management expertise, marketing, information systems,
capital resources and acquisition services to its affiliated dental practices.
As a result, the Company is involved in the financial and administrative
management of the affiliated dental practices, including legal, financial
reporting, cash management, human resources and insurance assistance. The
Company's goals in providing such services are (i) to allow the dentists
associated with affiliated dental practices to dedicate their time and efforts
more fully to patient care and professional practice activities; (ii) to improve
the performance of affiliated dental practices in these administrative and sales
activities; and (iii) to enhance the financial return to the Company.

     Aside from the centralization of functions mentioned above, the affiliated
dental practices are encouraged to administer their practices in accordance with
the needs of their specific patient populations. The practice of dentistry at
each affiliated dental practice is under the exclusive control of the dentists
who practice at those locations.

     The majority of services provided by the Company's affiliated dental
centers are classified as general dentistry. General dentistry includes
diagnostics, treatment planning, preventive care, removal of infection,
fillings, crowns, bridges, partials, dentures, and extractions, all of which are
currently being provided by the affiliated dental practices. Within its
networks, the Company provides a wide range of specialty dental services. The
Company seeks to expand the services offered by affiliated practices beyond
general dentistry to include other dental specialty services and to improve
efficiency by improving appointment availability, increasing practice visibility
and assisting the practices in adding complementary services. These
complementary services include orthodontics, periodontics (the diagnosis,
treatment and prevention of infection of the gums and supporting bone around the
teeth), endodontics (the diagnosis, treatment and prevention of infection of the
oral tissues), oral surgery and implantology (the placement of abutments
(implants) in the jaw bones to support tooth replacement). By adding these
complementary services to the practice, the affiliated dental practices will
retain the majority of specialty service referrals in-house, thereby increasing
patient revenues.

Operations

Center Design and Location

     The Company's dental centers are generally located in retail environments.
Many of the dental centers include semi-private general dentistry treatment
rooms, private treatment rooms and orthodontic bays. Currently, the Company's
dental centers include from four to 22 treatment rooms and range in size from
approximately 1,000 square feet to approximately 6,000 square feet.   New dental
centers, developed by the Company, range in size from 1,600 square feet to 4,000
square feet, and have from five to fourteen operatories.

     Since its formation, the Company has adapted its locations to accommodate
the full range of dental specialties, where feasible. The Company believes the
application of its method of designing and locating dental centers will
facilitate the expansion of services offered by the acquired practices. Where a
dental center is not able, due to limitations of floor space, zoning or other
reasons, to accommodate new services or specialists, the Company may seek to
relocate such dental center to a more desirable retail location as soon as
practicable.

Staffing and Scheduling

     The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many dental centers opening as early as 7:00 a.m. and closing as late as
9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The dental centers are staffed
with dentists and dental assistants every day they are open, with orthodontists
and other specialists rotating among several centers in order to utilize their
time optimally. Each patient typically is assigned to and sees the same dentist
or specialist on all visits to the center. Each dental center is also regularly
staffed with an office manager, front office staff and other support staff.

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Fees and Payment Plans

     The Company believes that fees charged by its affiliated practices are
typically lower than usual and customary fees within their respective markets.
The affiliated practices generally provide a wide range of payment options,
including cash, checks, credit cards, third party insurance and various forms of
credit. In general, most general dentistry and specialty services, other than
orthodontics, are paid for by the patient, or billed to the patient's insurance
carrier, on the date the service is rendered. In some instances, the Company
will extend credit in accordance with its established credit policies. The
Company believes that its lower fees and ability to assist patients in obtaining
financing provides it with a competitive advantage compared to sole
practitioners and small group practices.

     The Company's typical orthodontic payment plan consists of no initial down
payment and equal monthly payments during the term of treatment of $98 per
month, with an average contract period of approximately 26 months. After
consultation with the orthodontic staff at the initial visit, the patient signs
a contract outlining the terms of the treatment, including the anticipated
length of treatment and the total fees. The number of required monthly payments
is fixed at the beginning of the case and corresponds to the anticipated number
of monthly treatments.  In 1999, the Company adopted a payment policy requiring
that new orthodontic patients arrange for an automatic monthly bank draft.

Quality Assurance

     Affiliated dental practices are solely responsible for all aspects of the
practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. The Company's management structure is designed to
assist its affiliated dental practices in their recruiting and professional
training. The Company expects that the increased visibility of the Company, the
ability to offer career paths previously unavailable to dentists and the ability
to recruit for multiple markets will give it an advantage in recruiting and
retaining dentists. In addition, the Company believes that the ability to offer
dentists in private practice the chance to practice in an environment where they
do not assume capital risks and administrative burdens normally associated with
private practice will make joining the Company an attractive choice for private
practitioners.

Sales and Marketing

     The Company has established a consistent national identity for its business
and utilizes the "Castle Dental Centers" name and logo at all its dental
centers. As of December 31, 2001, the Castle Dental Centers name had been
implemented at all affiliated locations except for two dental centers in
California.  The Company applies traditional retail principles of business to
the provision of dental care. These principles include network development,
extended hours of operation, location optimization, signage, customized
treatment schedules, affordable fees and payment plans. The Company uses both
print advertising and professionally produced broadcast advertising to market
its dental services to potential patients.

     The Company has also established a national telemarketing system in
Houston, Texas to field calls generated by advertising, to confirm upcoming
scheduled patient visits and to encourage patients to return for follow-up
visits. The national telemarketing system is based on a national 800 number (1-
800-TO SMILE) and utilizes state-of-the-art software to identify patients and
direct them to the nearest Company operated dental center. The telemarketers can
enter all relevant information into the practice management information system
for patients making appointments for an initial visit, including pre-screening
patients for insurance and other credit information.

Managed Care Contracts

     The Company negotiates, on behalf of its affiliated dental practices,
contracts with dental healthcare maintenance organizations, insurance companies,
self insurance plans and other third-party payers pursuant to which services are
provided on some type of discounted fee-for-service or capitated basis.  Under
capitated contracts the affiliated dental practice receives a predetermined
amount per patient per month in exchange for providing certain necessary covered
services to members of the plan.  Usually, the capitated plans also provide for
supplemental payments and/or co-payments by members for certain higher cost
procedures such as crowns, root canal therapy and dentures.  These contracts
typically result in lower average fees for services than the

                                       7
<PAGE>

usual and customary fees charges by the Company's affiliated dental practices
and may, in certain instances, expose the Company to losses on contracts where
the total revenues received are less than the costs of providing such dental
care. The Company generally bears the risk of such loss because it consolidates
the financial results of its affiliated dental practices. However, most of these
contracts are cancelable by either party on 60 to 90 days written notice thereby
reducing the risk of long-term adverse impact on the Company.

     At December 31, 2001, the Company and its affiliated dental practices
maintained an aggregate of 41 capitated managed care contracts covering
approximately 172,000 members. Capitation fees, including supplemental fees and
excluding co-payments by members, totaled  $9.6 million, or approximately 9.8%
of net patient revenues in 2001. One managed care contract with a national
insurance company accounted for $7.2 million in revenues ($3.6 million in
capitation payments and $3.6 million in patient co-payments) in 2001, equal to
7.4% of total net patient revenues. The Company periodically evaluates its
capitated managed care contracts by comparing the average reimbursement per
procedure plus the total capitation fees per contract to the usual and customary
fees charged by the affiliated dental practice. If the aggregate reimbursement
percentage for the capitated contract exceeds 55% of the usual and customary
fees, the Company believes that the incremental costs of providing covered
services are being recovered. Management believes that capitated managed care
contracts, in the aggregate, are profitable, however, the Company plans to
selectively review its contracts with managed care companies in order to improve
the financial performance of these plans and to limit the growth of enrolled
members in such plans to levels no higher than at year-end 2001.

Competition

     The dental care industry is highly fragmented, comprised principally of
sole practitioners and group practices of dental and orthodontic services. The
dental practice management industry is subject to continuing changes in the
provision of services and the selection and compensation of providers. The
Company is aware of several dental practice management companies, both publicly-
traded and privately owned, that it competes with in its markets. Publicly
traded dental practice management companies that compete with the Company
include Monarch Dental Corporation, American Dental Partners, Inc., Interdent,
Inc., and Coast Dental Services, Inc., as well as others. Certain of these
competitors are larger and better capitalized, may provide a wider variety of
services, may have greater experience in providing dental care management
services and may have longer established relationships with buyers of such
services.

     In certain markets, the demand for dental care professional personnel
presently exceeds the supply of qualified personnel. As a result, the Company
experiences competitive pressures for the recruitment and retention of qualified
dentists to deliver their services. The Company's future success depends in part
on its ability to continue to recruit and retain qualified dentists to serve as
employees or independent contractors of the affiliated dental practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of competent dentists to continue to expand its operations.

Management Information Systems

     During 1999, the Company completed the integration of the dental practice
management systems in all its dental centers into a single practice management
system, provided by a third party, that is centralized in Houston.  This system
monitors and controls patient treatment, scheduling, invoicing of patients and
insurance companies, productivity of clinical staffs and other practice related
activities. During the third quarter of 1999 the Company implemented a web-based
purchase order system to enable management to monitor and control dental and
office supplies purchasing.

     The Company also utilizes centralized financial information and accounting
systems.  These systems are linked to the practice management systems allowing
for automatic transfer of data between the practice management and financial
information systems.

                                       8
<PAGE>

Regulation

General

     The practice of dentistry is highly regulated, and there can be no
assurance that the regulatory environment in which the affiliated dental
practices and the Company operate will not change significantly in the future.
In general, regulation of health care related companies also is increasing.

     Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. In addition, federal and state laws regulate
health maintenance organizations and other managed care organizations for which
dentists may be providers. Consequently the Company may become subject to
compliance with additional laws, regulations and interpretations or enforcement
thereof. The ability of the Company to operate profitably will depend in part
upon the Company and its affiliated dental practices obtaining and maintaining
all necessary licenses, certifications and other approvals and operating in
compliance with applicable health care regulations.

     Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, those standards have not had any
material adverse effect on the operations of the dental practices managed by the
Company. Based on its familiarity with the operations of the dental practices
managed by the Company, management believes that it, and the practices it
manages, are in compliance in all material respects with all applicable federal,
state and local laws and regulations relating to safety and health.

Medicare and Medicaid Fraud and Abuse

     Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Because dental services are
covered under various government programs, including Medicare, Medicaid or other
federal and state programs, the law applies to dentists and the provision of
dental services. Pursuant to this anti-kickback law, the federal government
announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Many states have similar anti-
kickback laws, and in many cases these laws apply to all types of patients, not
just Medicare and Medicaid beneficiaries. The applicability of these federal and
state laws to many business transactions in the health care industry, including
the Company's operations, has not yet been subject to judicial interpretation.

     Significant prohibitions against physician self-referrals, including those
by dentists, for services covered by Medicare and Medicaid programs were
enacted, subject to certain exceptions, by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II"
amended prior physician and dentist self-referral legislation known as "Stark I"
(which applied only to clinical laboratory referrals) by dramatically enlarging
the list of services and investment interests to which the referral prohibitions
apply. Effective January 1, 1995 and subject to certain exceptions, Stark II
prohibits a physician or dentist or a member of his immediate family from
referring Medicare or Medicaid patients to any entity providing "health
services" in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has entered into a compensation
arrangement, including the "physician's or dentist's" own group practice unless
such practice satisfies the group practice exception. The designated health
services include the provision of clinical laboratory services, radiology and
other diagnostic services (including ultrasound services), radiation therapy
services, physical and occupational therapy services, durable medical equipment,
parenteral and enteral nutrients, certain equipment and supplies, prosthetics,
orthotics, outpatient prescription drugs, home health services and inpatient and
outpatient hospital services. A number of states also have laws that prohibit
referrals for certain services such as x-rays by dentists if the dentist has
certain enumerated financial relationships with the entity receiving the
referral, unless an exception applies.

     Noncompliance with, or violation of, the federal anti-kickback legislation
or Stark II can result in exclusion from Medicare and Medicaid as well as civil
and criminal penalties. Similar penalties are provided for violation of state
anti-kickback and self-referral laws. To the extent that the Company or any
affiliated dental practice is deemed to be subject to these federal or similar
state laws, the Company believes

                                       9
<PAGE>

its intended activities will comply in all material respects with such statutes
and regulations.

State Legislation

     In addition to the anti-kickback laws and anti-referral laws noted above,
the laws of many states prohibit dentists from splitting fees with non-dentists
and prohibit non-dental entities such as the Company from engaging in the
practice of dentistry and from 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. However, the restrictions are generally designed to
prohibit a non-dental entity from controlling the professional assets of a
dental practice (such as patient records, payer contracts and, in certain
states, dental equipment), employing dentists to practice dentistry (or, in
certain states, employing dental hygienists or dental assistants), controlling
the content of a dentist's advertising or professional practice or sharing
professional fees. The laws of many states also prohibit dental practitioners
from paying any portion of fees received for dental services in consideration
for the referral of a patient. In addition, many states impose limits on the
tasks that may be delegated by dentists to dental assistants.

     State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; licensed
dentists have control over the manner in which dental care is provided and all
decisions affecting the provision of dental care. State laws generally require
that the amount of a management fee be reflective of the fair market value of
the services provided by the management company and certain states require that
any management fee be a flat fee or cost-plus fee based on the cost of services
performed by the Company. In general, the state dental practice acts do not
address or provide any restrictions concerning the manner in which companies
account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.

     The Company does not control the practice of dentistry or employ dentists
to practice dentistry. Moreover, in states in which it is prohibited the Company
does not employ dental hygienists or dental assistants. The Company provides
management services to its affiliated practices, and the management fees the
Company charges for those services are consistent with the laws and regulations
of the jurisdictions in which it operates.

     In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is subject to interpretation by regulators with broad discretion. As the
Company or its affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service basis arrangements, the
Company or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the affiliated practices are determined
to be engaged in the business of insurance, these parties could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third-party payors, and may become subject to regulatory
enforcement actions. In such events, the Company's revenues may be adversely
affected.

Regulatory Compliance

     The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations or marketing from time to time in response to changes in the
business, statutory and regulatory environments. The Company plans to structure
all of its agreements, operations and marketing in compliance with applicable
law, although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not have a material adverse
effect on operations or profitability.

Employees

     As of December 31, 2001, the Company and its affiliated dental practices
employed approximately 1,240

                                       10
<PAGE>

administrative and dental office personnel on a full-time or part-time basis,
and the affiliated dental practices employed approximately 190 general dentists
and specialists on a full-time or part-time basis. The affiliated dental
practices generally enter into employment or independent contractor agreements
with their affiliated dentists. The Company believes that its relations with its
employees are good.

Corporate Liability and Insurance

  The provision of dental services entails an inherent risk of professional
malpractice and other similar claims. Although the Company does not influence or
control the practice of dentistry by dentists or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
dentists and dental groups, the contractual relationship between the Company and
the affiliated dental practices may subject the Company to some medical
malpractice actions under various theories, including successor liability. There
can be no assurance that claims, suits or complaints relating to services and
products provided by managed practices will not be asserted against the Company
in the future. The availability and cost of professional liability insurance has
been affected by various factors, many of which are beyond the control of the
Company. Significant increases in the cost of such insurance to the Company and
its affiliated dental practices may have an adverse effect on the Company's
operations.

  The Company requires each affiliated dental practice to maintain comprehensive
general liability and professional liability coverage covering the practice and
each dentist retained or employed by the affiliated dental practice, which
normally provide for comprehensive general liability coverage of $1.0 million
for each occurrence and $3.0 million annual aggregate, and professional
liability coverage of not less than $1.0 million for each occurrence and $3.0
million annual aggregate.

  The Company maintains other insurance coverage including general liability,
property, business interruption and workers' compensation, which management
considers to be adequate for the size of the Company and the nature of its
business.

Item 2. Properties

  The Company leases approximately 10,000 square feet of space for executive,
administrative, sales and marketing and operations offices in Houston, Texas.
The lease expires in July 2006 and is subject to renewal options.

  All of the Company's existing dental centers are leased. Two of the dental
centers are owned by an affiliate of the  Company and one dental center is owned
by a former director of the Company.  On March 31, 2002, the Company closed the
dental center leased from the former director and is negotiating the termination
of the lease, which runs through December 2005.

  The Company intends to lease centers or enter into build-to-suit arrangements
with third parties for dental centers to be leased by the Company. Certain
leases provide for fixed minimum rentals and provide for additional rental
payments for common area maintenance, insurance and taxes. The leases carry
varying terms expiring between 2002 and 2011 excluding options to renew.

  The majority of the centers are located in retail locations. The Company
believes that its leased facilities are well maintained, in good condition and
adequate for its current needs. Furthermore, the Company believes that suitable
additional or replacement space will be available when required.

Item 3. Legal Proceedings

  In December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction.  In August 2000, the arbitrator found that the subsidiaries had
breached a contractual agreement to complete the acquisition and awarded the
plaintiffs actual damages and costs of $442,000.  In August 2000, the arbitrator
awarded the plaintiffs an additional $666,000 for attorney fees and costs,
resulting in a total judgment of $1,108,000 against the Company's subsidiaries.
This amount, as well as additional legal expenses incurred by the Company, was
included in the litigation expenses of $1.5 million recorded in June 2000.  None
of the judgment amount awarded to the plaintiffs has been paid as of April 15,
2002, although the Company has reached a tentative agreement with the plaintiff
to pay the judgment

                                       11
<PAGE>

over a fifty-month period after receiving agreement from its senior bank
creditors to make such payments.

  In October 2001, the former owners of Dental Centers of America filed suit in
Bexar County, Texas alleging that the Company breached a letter agreement
offering payment as settlement for past due amounts on two subordinated
promissory notes that were part of the purchase consideration for Dental Centers
of America.  In March 2002, the plaintiffs obtained a judgment for $625,000 plus
interest and attorneys' fees, against the Company.  The Company is currently
involved in settlement negotiations with the plaintiffs and none of the judgment
award has been paid as of April 15, 2002.

  The Company also is a defendant in two lawsuits with landlords of two leased
properties that were abandoned by the Company in 2001 as part of its
restructuring plan.  The leases had remaining terms of 42 and 68 months at
monthly rental rates of $3,800 and $4,700, respectively, at the time the Company
stopped paying rent on the leases.  The Company is attempting to negotiate
settlements with the landlords.

  The Company and certain of its subsidiaries are parties to a number of legal
proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.

Item 4.  Submission of Matters to a Vote of Security Holders

  None

                                       12
<PAGE>

PART II

Item 5.  Market For  Registrant's Common Equity and Related Stockholder Matters

  Prior to April 2001, the Company's common stock was traded in the over-the-
counter market and quoted on the Nasdaq National Market.  Currently, the
Company's common stock is traded in the over-the-counter market and quoted on
the OTC Bulletin Board under the symbol "CASL.OB." The following table presents
the quarterly high and low sale prices as reported by the Nasdaq National Market
and, for periods after April, 2001, the quarterly high and low bid prices as
reported by the OTC Bulletin Board.  These quotations reflect the inter-dealer
prices, without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.

                                          High       Low
                                          ----       ----
  2000:
  ----
  First Quarter......................     4.88       2.31
  Second Quarter.....................     4.00       1.50
  Third Quarter......................     3.25       1.88
  Fourth Quarter.....................     2.00       0.19

  2001:
  ----
  First Quarter......................     0.38       0.13
  Second Quarter.....................     0.28       0.10
  Third Quarter......................     0.29       0.19
  Fourth Quarter.....................     0.20       0.07

  As of March 31, 2002, there were 6,417,206 shares of the Company's Common
Stock outstanding held by approximately 42 stockholders of record. The Company
believes there are approximately 1,000 beneficial owners of the Common Stock.

  The Company has never paid a cash dividend on its Common Stock. The Company
currently intends to retain earnings to finance the development of its business
and does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. In addition, the Company's bank credit facility prohibits
the payment of dividends while the Company is in default thereunder.

                                       13
<PAGE>

Item 6.  Selected Financial Data

   The selected financial data of the Company should be read in conjunction
with the related consolidated financial statements, notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                 -----------------------------------------------------------------
                                                                   1997         1998           1999        2000          2001
                                                                 --------      ------          ----        -----         ----
                                                                                (in thousands, except per share data)
<S>                                                              <C>           <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues.......................................      $ 46,225      $  74,823    $  102,701   $ 106,023    $  97,924
Expenses:
  Dentist salaries and other professional costs............        11,325         18,516        26,984      28,384       27,091
  Clinical salaries........................................        10,248         16,612        21,408      20,795       19,956
  Dental supplies and laboratory  fees.....................         4,335          7,197         9,641      11,730       11,760
  Rental and lease expenses................................         2,590          4,091         6,203       7,608        6,433
  Advertising and marketing................................         2,033          2,763         3,650       3,847        3,283
  Depreciation and amortization............................         1,987          3,535         5,792       6,796        6,593
  Other operating expenses.................................         2,467          4,431         6,154       7,344        8,016
  Bad debt expenses........................................         1,847          2,545         4,160      15,325        4,948
  Restructuring costs and other charges....................            --             --            --          --        2,329
  General and administrative...............................         5,929          8,145        10,909      13,128       11,291
  Asset impairment.........................................             -              -             -       3,567        2,929
                                                                 --------      ---------    ----------   ---------    ---------
      Total expenses.......................................        42,761         67,835        94,901     118,524      104,629
                                                                 --------      ---------    ----------   ---------    ---------
  Operating income (loss)..................................         3,464          6,988         7,800     (12,501)      (6,705)
  Litigation settlement....................................             -              -         1,366       1,495            -
  Interest expenses........................................         2,937          1,969         4,369       7,751        7,960
  Other (income) expenses..................................           (84)           (57)           34         (28)         (68)
                                                                 --------      ---------    ----------   ---------    ---------
  Income (loss) before provision (benefit) for income
    taxes, extraordinary loss and cumulative effect
    of change in accounting principle......................           611          5,076         2,031     (21,719)     (14,597)
  Provision (benefit) for income taxes.....................           200          1,490           835      (2,595)           -
                                                                 --------      ---------    ----------   ----------   ---------
  Income (loss) before extraordinary loss and
    cumulative effect of change in accounting principle....           411          3,586         1,196     (19,124)     (14,597)
  Extraordinary loss.......................................        (3,195)             -             -           -            -
  Cumulative effect of change in accounting principle......             -              -             -           -         (250)
                                                                 --------      ---------    ----------   ---------    ---------
  Net income (loss)........................................        (2,784)         3,586         1,196     (19,124)     (14,847)
  Preferred stock dividends (1)............................        (1,930)             -             -           -            -
                                                                 --------      ---------    ----------   ---------    ---------
  Net income (loss) attributable to common stock...........      $ (4,714)     $   3,586    $    1,196   $ (19,124)   $ (14,847)
                                                                 ========      =========    ==========   =========    =========

Income (loss) per common share:
  Basic and diluted:
  Income (loss) before extraordinary loss and
    cumulative effect of change in accounting principle....      $   0.10      $    0.54    $     0.18   $   (2.96)   $   (2.27)
Extraordinary loss.........................................         (0.78)            --            --          --           --
Cumulative effect of change in accounting principle........            --             --            --          --        (0.04)
                                                                 --------      ---------    ----------   ---------    ---------
   Net income (loss).......................................      $  (0.68)     $    0.54    $     0.18   $   (2.96)   $   (2.31)
                                                                 ========      =========    ==========   =========    =========
Weighted average number of common and common equivalent
shares outstanding
    Basic..................................................         4,100          6,586         6,825       6,451        6,417
                                                                 ========      =========    ==========   =========    =========
    Diluted................................................         4,132          6,608         6,850       6,451        6,417
                                                                 ========      =========    ==========   =========    =========
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                 ---------------------------------------------------------------
                                                                   1997          1998         1999         2000           2001
                                                                   ----          ----         ----         ----           ----
                                                                                         (in thousands)
<S>                                                              <C>           <C>          <C>          <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................      $  2,908      $   695      $     59     $     901      $  3,979
Working capital (deficit)..................................         3,917       10,345        15,768       (62,259)      (67,843)
Total assets...............................................        44,513      100,035       114,982        95,386        84,082
Long-term debt, less current portion.......................         3,659       44,937        53,996           429            16
Redeemable preferred stock.................................         1,550            -             -             -             -
Total stockholders' equity.................................        31,113       36,397        37,163        18,039         3,192
</TABLE>

(1)  The Company recorded a non-cash dividend to accrete the Series A
     Convertible Preferred Stock and Series C Convertible Preferred Stock to
     their estimated fair value.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Introduction

  The Company manages and operates integrated dental networks through
contractual affiliations with general, orthodontic and multi-specialty dental
practices in Texas, Florida, Tennessee and California. The Company does not
engage in the practice of dentistry but rather establishes integrated dental
networks by entering into management services agreements with affiliated dental
practices to provide on an exclusive basis management and administrative
services to affiliated dental practices. As of December 31, 2001, the Company
provided management services to 88 dental centers with approximately 190
affiliated dentists, orthodontists and other dental specialists.

  Certain of the affiliated dental practices derive a significant portion of
their revenues from managed care contracts, preferred provider arrangements and
other negotiated price agreements. While the Company generally negotiates the
terms and conditions of managed care contracts, preferred provider arrangements
and other negotiated price agreements, the affiliated dental practices are the
contracting parties for all such relationships, and the Company is dependent on
its affiliated dental practices for the success of such relationships. The
Company generally bears the risk of loss resulting from any such arrangements
because it consolidates the financial results of its affiliated dental
practices.  However, most of these contracts are cancelable by either party on
60 to 90 days written notice, thereby reducing the risk of long-term adverse
impact on the Company.

  At December 31, 2001, the Company and its affiliated dental practices
maintained an aggregate of 41 capitated managed care contracts covering
approximately 172,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled  $9.6 million, or approximately 9.8% of net
patient revenues in 2001. One managed care contract with a national insurance
company accounted for $7.2 million in revenues ($3.6 million in capitation
payments and $3.6 million in patient co-payments) in 2001, equal to 7.4% of
total net patient revenues. The Company periodically evaluates its capitated
managed care contracts by comparing the average reimbursement per procedure plus
the total capitation fees per contract to the usual and customary fees charged
by the affiliated dental practice. If the aggregate reimbursement percentage for
the capitated contract exceeds 55% of the usual and customary fees, the Company
believes that the incremental costs of providing covered services are being
recovered. Management believes that capitated managed care contracts, in the
aggregate, are profitable and the Company will continue to contract with
capitated managed care providers on a case-by-case basis.

Components of Revenues and Expenses

  Net patient revenues represent amounts billed by the affiliated dental
practices to patients and third-party payors for dental services rendered. Such
amounts also include monthly capitation payments received from third-party
payors pursuant to managed care contracts. Net revenues are reported at
established rates reduced by contractual amounts based on agreements with
patients, third party payers and others obligated to pay for services rendered.

  Under the terms of the typical management services agreement with an
affiliated dental practice,

                                       15
<PAGE>

the Company becomes the exclusive manager and administrator of all non-dental
services relating to the operation of the practice. While actual terms of the
various management agreements may vary from practice to practice, material
aspects of all the management service agreements, including the ability of the
Company to nominate the majority shareholder and the calculation of the
management fees, are consistent. The obligations of the Company include assuming
responsibility for the operating expenses incurred in connection with managing
the dental centers. These expenses include salaries, wages and related costs of
non-dental personnel, dental supplies and laboratory fees, rental and lease
expenses, advertising and marketing costs, management information systems, and
other operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to the
billing and collection of accounts receivable, financial management and control
of the dental operations, insurance, training and development, and other general
corporate expenditures.

Results of Operations

  The following table sets forth the percentages of patient revenues represented
by certain items reflected in the Company's Statements of Operations. The
information that follows represents historical results of the Company and does
not include pre-acquisition results of the dental practices that the Company has
acquired. The Company did not acquire any dental practices in the period from
1999 through 2001 although it did acquire, in March 2000, the 20% minority
interest in its California subsidiary that it did not previously own.


<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                           -----------------------------------
                                                                             1999          2000         2001
                                                                           ----------  -----------  ----------
<S>                                                                        <C>         <C>          <C>
Net patient revenues....................................................     100.0%       100.0%      100.0%
Expenses:
    Dentist salaries and other professional costs.......................      26.3%        26.8%       27.7%
    Clinical salaries...................................................      20.8%        19.6%       20.4%
    Dental supplies and laboratory fees.................................       9.4%        11.1%       12.0%
    Rental and lease expense............................................       6.0%         7.2%        6.6%
    Advertising and marketing...........................................       3.6%         3.6%        3.4%
    Depreciation and amortization.......................................       5.6%         6.4%        6.7%
    Other operating expenses............................................       6.0%         6.9%        8.2%
    Bad debt expense....................................................       4.1%        14.5%        5.1%
    Restructuring costs and other charges...............................        --           --         2.4%
    General and administrative..........................................      10.6%        12.4%       11.5%
    Asset impairment....................................................        --          3.4%        3.0%
                                                                           -------      -------     -------
        Total expenses..................................................      92.4%       111.8%      106.8%
                                                                           -------      -------     -------
  Operating income(loss)................................................       7.6%       -11.8%       -6.8%
  Litigation settlement.................................................       1.3%         1.4%        0.0%
  Interest expense......................................................       4.3%         7.3%        8.1%
                                                                           -------      -------     -------
  Income (loss) before provision (benefit) for income taxes
    and cumulative effect of change in accounting principle.............       2.0%       -20.5%      -14.9%
  Provision (benefit) for income taxes..................................       0.8%        -2.4%        0.0%
                                                                           -------      -------     -------
  Income (loss) before cumulative effect of change in
    accounting principle................................................       1.2%       -18.0%      -14.9%
  Cumulative effect of change in accounting principle...................        --           --        -0.3%
                                                                           -------      -------     -------
  Net income (loss).....................................................       1.2%       -18.0%      -15.2%
                                                                           =======      =======     =======
</TABLE>


Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December
31, 2000

  Net Patient Revenues - Net patient revenues decreased from $106.0 million for
the year ended December 31, 2000 to $97.9 million for the year ended December
31, 2001, a decrease of $8.1 million or 7.6%.  Patient

                                       16
<PAGE>

revenues from dental centers opened for more than one year decreased
approximately $3.4 million, or 3.2%, offset slightly by de novo dental centers
opened in 2000. The decrease is attributable to the slowdown in general economic
activity during 2001 and the lower number of dentists in 2001 compared to the
prior year. The closing of 14 dental centers in the last year accounted for $5.0
million of the decrease in revenues.

  Dentist Salaries and Other Professional Costs - Dentist salaries and other
professional costs consist primarily of compensation paid to dentists,
orthodontists, and hygienists employed by the affiliated dental practices.  For
the year ended December 31, 2001, dentist salaries and other professional costs
were $27.1 million, a decrease of  $1.3 million, or 4.6% lower than costs of
$28.4 million for the year ended December 31, 2000.  The decrease is
attributable to the closing of 14 dental centers during 2000 and 2001 and the
reduction in the number of dentists during the year. Expressed as a percentage
of net patient revenues, dentist salaries and other professional costs increased
from 26.8% to 27.7% for the year ended December 31, 2000 and 2001, respectively.

  Clinical Salaries - Clinical salaries decreased from $20.8 million for the
year ended December 31, 2000 to $20.0 million for the year ended December 31,
2001, a decrease of $0.8 million or 4.0%, resulting from the closing of 14
dental centers during 2000 and 2001. Expressed as a percentage of net patient
revenues, clinical salaries increased slightly from 19.6% for the year ended
December 31, 2000 to 20.4% for the year ended December 31, 2001.

  Dental Supplies and Laboratory Fees - Dental supplies and laboratory fees
increased from  $11.7 million for the year ended December 31, 2000, to $11.8
million for the year ended December 31, 2001, a slight increase of $0.1 million,
or 0.3%. Higher laboratory fees resulting from price increases and outsourcing
of certain lab functions accounted for the increase.  Expressed as a percentage
of patient revenues, dental supplies and laboratory fees increased from 11.1%
for the year ended December 31, 2000 to 12.1% for the year ended December 31,
2001.

  Rental and Lease Expense - Rental and lease expense decreased from $7.6
million for the year ended December 31, 2000 to $6.4 million for the year ended
December 31, 2001, a decrease of $1.2 million, or 15.4%.  The decrease resulted
from the closing of 14 dental centers in the last year and the provision for
rents on closed centers that was recorded in 2000.  Expressed as a percentage of
net patient revenues, rental and lease expense decreased from 7.2% for the year
ended December 31, 2000 to 6.6% for the year ended December 31, 2001.

  Advertising and Marketing - Advertising and marketing expenses decreased from
$3.8 million for the year ended December 31, 2000, to $3.3 million in 2001, a
decrease of $0.5 million, or 14.7%.  Lower expenditures on television
advertising, yellow pages advertisements and reduced promotional costs accounted
for the decrease.  Expressed as a percentage of net patient revenues,
advertising and marketing expenses decreased from 3.6% for the year ended
December 31, 2000 to 3.4% for the year ended December 31, 2001.

  Depreciation and Amortization - Depreciation and amortization decreased from
$6.8 million for the year ended December 31, 2000 to $6.6 million for the year
ended December 31, 2001, a decrease of $0.2 million, or 3.0%.  The decrease is
attributable to the write off of certain intangible expenses and property and
equipment in late 2000. Expressed as a percentage of net patient revenues,
however, depreciation and amortization increased from 6.4% in the prior year to
6.7% for the year ended December 31, 2001.

  Other Operating Expenses - Other operating expenses increased from $7.3
million for the year ended December 31, 2000, to $8.0 million for the year ended
December 31, 2001, an increase of $0.7 million or 9.2%.  The increase is
attributable primarily to higher insurance costs, management recruiting expenses
and third-party financing costs.  Expressed as a percentage of net patient
revenues, other operating expenses increased from 6.9% for the year ended
December 31, 2000 to 8.2% for year ended December 31, 2001.

  Bad Debt Expense - Bad debt expense of $4.9 million for the year ended
December 31, 2001 decreased by $10.4 million, or 67.7%, from $15.3 million for
the year ended December 31, 2000.  In 2000, the Company changed its estimates
for the collectibility of certain categories of accounts receivable resulting in
additional charges of $7.9 million on billed accounts receivable and $2.1
million of unbilled accounts receivable from orthodontic patients.  Excluding
these charges, bad debt expense, expressed as a percentage of net patient
revenues increased slightly, from 5.0% for the year ended December 31, 2000 to
5.1% for the year

                                       17
<PAGE>

ended December 31, 2001.

  Restructuring Costs and Other Charges - For the year ended December 31, 2001
the Company recorded restructuring costs and other charges of $2.3 million
including severance costs, remaining lease obligations on closed offices and
legal and professional fees related to the implementation of the plan to improve
operating results and restructure the Company's credit facilities.  (See Note 4
of Notes to Consolidated Financial Statements)

  General & Administrative - General and administrative expenses decreased from
$13.1 million for the year ended December 31, 2000, to $11.3 million for the
year ended December 31, 2001, a decrease of $1.8 million, or 14.0%.  The
decrease is attributable to reductions in corporate and regional overhead costs
and the reorganization of field management during 2001.  Expressed as a
percentage of net patient revenues, general and administrative expense decreased
from 12.4% to 11.5% for the years ended December 31, 2000 and 2001,
respectively.

  Asset Impairment - For the year ended December 31, 2001 the Company recorded a
$2.9 million asset impairment, resulting primarily from the closing of two
dental centers in Texas and Tennessee, a charge to reflect the impairment in
value of fixed assets for two under-performing dental centers and the write-off
of intangible assets associated with certain acquisitions.  As a result, the
Company reduced intangible assets by approximately $2.4 million and leasehold
improvements by approximately $0.5 million. For the year ended December 31,
2000, the Company recorded a $3.6 million asset impairment, resulting primarily
from the closing of six dental offices in Florida, Texas and California, a
charge to reflect the impairment in the value of fixed assets for eleven under-
performing dental centers, and the write-off of related intangible assets and
long-term receivables associated with certain acquisitions.  As a result, the
Company reduced intangible assets by approximately $1.2 million, leasehold
improvements and equipment by approximately $1.7 million, and other assets by
approximately $0.7 million

  Litigation settlement - For the year ended December 31, 2000, the Company
recorded a $1.5 million charge resulting from an adverse arbitration award in an
arbitration proceeding in Los Angeles, California (See Note 5 of Notes to
Consolidated Financial Statements).

  Interest Expense - Interest expense increased from $7.8 million for the year
ended December 31, 2000 to $8.0 million for the year ended December 31, 2001, an
increase of $0.2 million or 2.7%.  The increase resulted from the accrual of a
full year of default interest related to the various defaults under the
Company's credit agreements, offset by lower interest rates during 2001.

  Benefit for Income Taxes -For the year ended December 31, 2000, the Company
recorded a benefit for income taxes of $2.6 million against a loss before income
taxes of  $21.7 million. The benefit for income taxes in fiscal 2000 was reduced
by a valuation allowance of approximately $5.2 million that was recorded against
the Company's entire deferred tax asset.  For the year ended December 31, 2001,
the Company did not record a benefit for income taxes against a pre-tax loss of
$14.6 million as the benefit was reduced by a valuation allowance of
approximately $8.9 million. The Company's valuation allowance for both periods
was recorded as there is no assurance the Company will be able to realize the
tax asset in future periods.

  Cumulative Effect of Change in Accounting Principle - During September 1998,
the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivative instruments as either assets or liabilities on the
balance sheet and measure those instruments at fair value.  SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," deferred the implementation of SFAS
133 until the fiscal year ending December 31, 2001.  The Company implemented
SFAS 133 effective January 1, 2001.  In July 2000, the Company entered into a
swap agreement with a bank.  The term of the swap contract expired July 10,
2001.  The cumulative effect of the accounting change as of January 1, 2001, was
a charge of $0.3 million, or $0.04 per common share, that was reflected in the
first quarter of 2001.

Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999

  Net Patient Revenues - Net patient revenues of affiliated dental practices
increased from $102.7 million for the year ended December 31, 1999, to $106.0
million for the year ended December 31, 2000, an

                                       18
<PAGE>

increase of $3.3 million or 3.2%. Approximately $5.4 million of the increase was
attributable to the opening of de novo dental centers in Texas, Florida and
Tennessee. Patient revenues for dental centers open for more than one year
increased approximately $1.2 million, or 1.2%, offset by decreased revenues of
approximately $3.3 million from dental centers closed in the last year.

  Dentist Salaries and Other Professional Costs - Dentist salaries and other
professional costs consist primarily of compensation paid to dentists,
orthodontists, and hygienists employed by the affiliated dental practices.  For
the year ended December 31, 2000, dentist salaries and other professional costs
were $28.4 million, an increase of $1.4 million or 5.2% from the comparable
period of 1999.  The increase was due primarily to the staffing of de novo
dental centers and increased dentist compensation resulting from higher net
patient revenues.  Expressed as a percentage of net patient revenue, dentist
salaries and other professional costs increased from 26.3% for 1999 to 26.8% for
2000.

  Clinical Salaries - Clinical salaries decreased from $21.4 million for the
year ended December 31, 1999, to $20.8 million for the year ended December 31,
2000, a decrease of $0.6 million or 2.9%.  The decrease was due primarily to
reduced staffing in the dental centers. Expressed as a percentage of net patient
revenues, clinical salaries decreased from 20.8% to 19.6% for the years ended
December 31, 1999 and 2000, respectively.

  Dental Supplies and Laboratory Fees - Dental supplies and laboratory fees
increased from $9.6 million for the year ended December 31, 1999 to $11.7
million for the year ended December 31, 2000, an increase of $2.1 million or
21.7%. The increase is attributable to additional dental supplies required for
the opening of de novo dental centers and increased laboratory costs. Expressed
as a percentage of net patient revenues, dental supplies and laboratory fees
increased from 9.4% in 1999 to 11.1% in 2000.

  Rental and Lease Expense - Rental and lease expense increased from $6.2
million for the year ended December 31, 1999 to $7.6 million for the year ended
December 31, 2000, an increase of $1.4 million or 22.7%.  Lease expense in 2000
included the accrual of $0.7 million in lease expense on closed dental centers
and on properties that are under lease but that will not be built-out due to the
Company's plan to reduce capital expenditures. Excluding this charge, rent and
lease expense, expressed as a percentage of net patient revenues, increased from
6.0% in 1999 to 6.5% for the comparable 2000 period.  This increase is
attributable primarily to the addition of de novo dental centers.

  Advertising and Marketing - Advertising and marketing expense increased from
$3.6 million for the year ended December 31, 1999, to $3.8 million for the year
ended December 31, 2000, an increase of $0.2 million, or 5.4%.  Expressed as a
percentage of net patient revenues, advertising and marketing expense of 3.6%
for the year ended December 31, 2000 was unchanged from the prior year.

  Depreciation and Amortization - Depreciation and amortization increased from
$5.8 million for the year ended December 31, 1999 to $6.8 million for the year
ended December 31, 2000, an increase of $1.0 million, or 17.3%.  The increase
resulted from the addition of leasehold improvements and dental equipment
associated with de novo centers and management information system updates.
Expressed as a percentage of net patient revenues, depreciation and amortization
increased from 5.6% to 6.4% for the years ended December 31, 1999 and 2000,
respectively.

  Other Operating Expenses - Other operating expenses increased from $6.2
million for the year ended December 31, 1999, to $7.3 million for the year ended
December 31, 2000, an increase of $1.2 million or 19.3%.  Other operating
expenses include certain costs related to the operation of the Company's dental
centers such as maintenance, utilities and communications expenses. The increase
is attributable primarily to additional operating expenses associated with the
opening of de novo dental centers.  Expressed as a percentage of net patient
revenues, other operating expenses increased from 6.0% for the year ended
December 31, 1999 to 6.9% in 2000.

  Bad Debt Expense - Bad debt expense increased from $4.2 million for the year
ended December 31, 1999 to $15.3 million for the year ended December 31, 2000,
including charges of $10.0 million to record additional allowance for doubtful
accounts receivable.  The Company has changed its estimates for the
collectibility of certain categories of accounts receivable resulting in
additional charges of $7.9 million on billed accounts receivable and $2.1
million of unbilled accounts receivable from orthodontic patients.  Lower

                                       19
<PAGE>

collection rates on patients with insurance, slower payments from insurance
companies, and higher than expected attrition of orthodontic patients accounted
for the change in estimates.

  General & Administrative Expense - General and administrative expenses
increased from $10.9 million for the year ended December 31, 1999, to $13.1
million for the year ended December 31, 2000, an increase of $2.2 million, or
20.3%.  Excluding charges of $1.4 million, general and administrative expenses
were $11.7 million for the year ended December 31, 2000, 11.0% higher than
general and administrative expenses for the year ended December 31, 1999.  The
charges included investment costs related to the investigations of strategic
alternatives, provisions for litigation and severance costs.  Furthermore,
excluding these charges, general and administrative expenses, expressed as a
percentage of net patient revenues, were 11.1% for the year ended December 31,
2000 compared to 10.6% for the prior year.

  Asset Impairment - In the third quarter of 2000, the Company recorded a charge
of $1.9 million related to the closing of six dental centers in Florida,
California and Texas.  The closed offices included two dental centers on the
east coast of Florida, two centers in the Los Angeles area, and two centers in
Texas.  In December 2000, the Company recognized an additional charge of  $1.7
million to reflect the impairment in the value of fixed assets for eleven under-
performing dental offices.

  Litigation settlement - For the year ended December 31, 2000, the Company
recorded a $1.5 million charge resulting from an adverse arbitration award in an
arbitration proceeding in Los Angeles, California (See Note 5 of Notes to
Consolidated Financial Statements).  In the year ended December 31, 1999,
litigation expense of $1.4 million resulted from the settlement of a lawsuit
filed by the former owner of certain dental practices acquired by the Company in
1996.

  Interest Expense - Interest expense increased from $4.4 million for the year
ended December 31, 1999 to $7.8 million for the year ended December 31, 2000, an
increase of $3.4 million, or 77.4%.  The increase resulted from higher
borrowings and an increase in variable interest rates during 2000.  Also, in the
fourth quarter of 2000, the Company accrued additional interest expense of $0.5
million resulting from default interest charged by its lenders as a result of
the defaults on the Company's senior and senior subordinated credit facilities.

  Provision (benefit) for Income Taxes  - For the year ended December 31, 1999,
the Company recorded a provision for income taxes of $0.8 million, resulting
from income before income taxes of $2.0 million.  For the year ended December
31, 2000, the Company recorded a benefit for income taxes of $2.6 million
resulting from a loss before income taxes of $21.7 million. The benefit for
income taxes in fiscal 2000 was reduced by a valuation allowance of
approximately $5.2 million that was recorded against the Company's entire
deferred tax asset because there is no assurance that the Company will be able
to recognize the tax asset in the future.  Accordingly, the benefit for income
taxes recorded in the 2000 was limited to 11.9% of the loss before income taxes
compared to an effective tax rate of 41.1% recorded in the prior year.

Liquidity and Capital Resources

  Historically the Company has relied on cash flow from operations and
borrowings on its senior credit facility to finance its operations, and on a
combination of bank borrowings, the issuance of Company common stock and
subordinated seller notes, and the assumption of certain debt and lease
obligations to finance its acquisitions.

  At December 31, 2001 the Company had a net working capital deficit of $67.8
million, resulting primarily from the classification as a current liability of
$45.2 million of outstanding borrowings under the Company's senior bank credit
facility, $15.0 million in senior subordinated note and convertible note
agreements (see below) and $2.9 million in other subordinated notes. Current
assets consisted of cash and cash equivalents of $4.0 million, billed and
unbilled accounts receivable of $7.7 million and $1.4 million of prepaid
expenses and other current assets.  Current liabilities totaled $80.9 million,
consisting of $17.0 million in accounts payable and accrued liabilities, $63.8
million in current maturities of long-term debt and $0.1 million of deferred
compensation payable to a stockholder.

  For the year ended December 31, 2001, cash provided by operating activities
was approximately $4.4 million compared $3.5 million in 2000.  In 2001, cash
used in investing activities amounted to $0.9 for capital

                                       20
<PAGE>

expenditures to maintain the existing dental centers. For the year ended
December 31, 2000, cash used in investing activities was $8.3 million,
consisting of $5.0 million to acquire the remaining 20% minority interest in the
Company's California subsidiary and $3.3 million for capital expenditures. For
the year ended December 31, 2001, cash used in financing activities amounted to
$0.4 million in repayment of debt. For the year ended December 31, 2000, cash
provided by financing activities totaled $5.7 million representing $16.9 million
in proceeds from long-term debt offset partially by $9.1 million in repayments
of long-term debt and capital lease obligations, payment of $1.3 million in debt
issuance costs and $0.8 million reduction in bank overdrafts.

  During 2001, the Company's principal sources of liquidity consisted primarily
of cash, cash equivalents and accounts receivable.  The Company incurred losses
of $19.1 million in 2000 and $14.8 million in 2001, and, as a result, has not
been in compliance with certain financial covenants of the Credit Agreement, the
Subordinated Note Agreement and the Convertible Note Agreement since June 30,
2000 (collectively the "Debt Agreements").

  The Credit Agreement provides for borrowings up to $55.0 million and matures
November 2002. Advances under the Credit Agreement required quarterly interest
payments only through March 2001 at which time principal became payable
quarterly based on a five-year amortization with final payment at maturity.
Borrowings under the Credit Agreement may at no time exceed a specified
borrowing base, which is calculated as a multiple of the Company's earnings
before interest, income taxes, depreciation and amortization ("EBITDA"), as
adjusted. The Credit Agreement bears interest at variable rates, which are based
upon either the bank's base rate or LIBOR, plus, in either case, a margin which
varies according to the ratio of the Company's funded debt to the EBITDA, each
as defined in the Credit Agreement. A commitment fee is payable quarterly at
rates ranging from 0.125 percent to 0.5 percent of the unused amounts for such
quarter. The Credit Agreement contains affirmative and negative covenants that
require the Company to maintain certain financial ratios, limit the amount of
additional indebtedness, limit the creation or existence of liens, set certain
restrictions on acquisitions, mergers and sales of assets and restrict the
payment of dividends. At December 31, 2001, $45.2 million was outstanding under
the Credit Agreement.  In November 2001, the Credit Agreement became a term
note, therefore additional borrowings under the agreement are not available.

  The Subordinated Note Agreement and Convertible Note Agreement provided
borrowings of $13.7 and $1.3 million, respectively.  Proceeds from these notes
were used to reduce borrowings under the bank credit facility, to acquire a 20%
minority interest in the Company's California subsidiary and to reduce other
accrued liabilities and accounts payable.   Loans under the Subordinated Note
Agreement bear interest at the 90-day LIBOR rate plus five and one-half percent,
payable quarterly, and are due in eight quarterly installments beginning in the
sixty-third month following the closing date.  Loans under the Convertible Note
Agreement bear interest at the same rate as loans under the Subordinated Note
Agreement and are due on demand beginning seven years after the closing date
with a final maturity date of January 30, 2009.  The convertible note is
convertible at any time into 442,880 shares of Company common stock at the
request of the holders at a fixed conversion price of $3.1125 per share. The
Subordinated Note Agreement and Convertible Note Agreement contain affirmative
and negative covenants that require that Company to maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends.

  As a result of losses incurred in the 2000 and 2001, the Company has not been
in compliance with the financial covenants of the Debt Agreements since June 30,
2000. At December 31, 2001, approximately $45.2 million in senior debt and $15.0
million in subordinated debt were outstanding under the Debt Agreements in
addition to approximately $3.5 million in other outstanding subordinated debt.
Since the Company is in default under these agreements, all amounts outstanding
are subject to acceleration and have been classified as current liabilities.

  The Company has continued to pay interest (other than default interest) on the
amounts outstanding under the Credit Agreement, but has not made scheduled
principal payments of $11.3 million under the Credit Agreement, nor made
interest or principal payments of $5.8 million owed to subordinated creditors
since July 2000. During the last half of 2001, the Company negotiated with its
creditors and an unrelated third party concerning a potential equity investment
and the restructuring of the bank credit facility, the subordinated notes and
other Company debt. However, due to the deterioration in operating results in
the fourth
                                       21
<PAGE>

quarter 2001, the discussions concerning the potential equity investment were
terminated in January 2002 and the Company has continued negotiations with the
senior and subordinated lenders concerning a forbearance agreement or a
restructuring of the Company's debt. However, these negotiations have not
resulted in a forbearance agreement or restructuring of the debt as of April 15,
2002. There can be no assurance that the Company's lenders will consent to the
restructuring necessary to allow the Company to continue to operate. If the
Company and its lenders cannot reach an agreement, it may be necessary for the
Company to seek protection under Chapter 11 of the Bankruptcy Code. These
factors, among others, indicate that the Company may be unable to continue as a
going concern.

  During 2001, the Company implemented a plan to allow it to continue to operate
without the need for additional borrowings.  Components of this plan included:
(i) reorganization of field management to improve efficiency and reduce regional
overhead costs; (ii) reduction in corporate general and administrative costs
through job eliminations and reduction in other overhead expenses; (iii) closing
of unprofitable and under-performing dental centers; (iv) realignment of
accounts receivable management to focus on improved collection of insurance and
patient receivables; (v) restructuring of compensation for management to
emphasize performance-based incentives; and, (vi) cancellation of further de
novo development and reducing capital expenditures to maintenance levels.
While the plan resulted in lower operating costs during the last half of the
year, patient revenues were adversely affected by slower general economic
activity in the second half of 2001, the negative impact on retail sales caused
by the tragic events of September 11, and higher than anticipated attrition of
dentists during the year.  This resulted in lower than anticipated patient
revenues, particularly in the fourth quarter 2001, that resulted in operating
losses and severely reduced cash flows.

  For 2002, management plans to focus on: (i) increased hiring of new dentists
and improving dentist retention; (ii) continuing to monitor and close
unprofitable and under performing dental centers; (iii) refurbishing and
modernizing existing dental centers within capital expenditure constraints of
$1.5 million; (iv) upgrading dental office management personnel; and (v)
improving patient services in order to increase patient retention rates.

  However, there can be no assurance that the these efforts to improve operating
results and cash flows will be sufficient to allow the Company to meet its
obligations in a timely manner or that the Company's creditors will agree with
the its plan.  Therefore, there is substantial doubt about the Company's ability
to continue in existence.

Critical Accounting Policies

  Management's discussion and analysis of financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States.  The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.  On an ongoing basis, management evaluates these
estimates, including those related to net patient revenues, accounts receivable,
intangible assets and contingent liabilities.  The Company believes that of its
significant accounting policies (see Note 2 to the consolidated financial
statements), the following may involve a higher degree of judgment and
complexity.

  Net patient revenues represent the estimated realizable amounts to be received
from patients, third-party payors and others for services rendered by affiliated
dentists. They are reported at established rates reduced by contracted amounts
based on agreements with patients, third party payers and others obligated to
pay for service rendered.  Patient revenues from general dentistry are
recognized as the services are performed. Patient revenues from orthodontic
services are recognized in accordance with the proportional performance method.
Under this method, revenue is recognized as services are performed under the
terms of contractual agreements with each patient. Approximately 25% of the
services are performed in the first month with the remaining services recognized
ratably over the remainder of the contract. Billings under each contract, which
average approximately 26 months, are made equally throughout the term of the
contract, with final payment at the completion of the treatment.

  Net patient revenues include amounts received from capitated managed care
contracts that the Company negotiates on behalf of its affiliated dental
practices. Under capitated contracts the affiliated dental

                                       22
<PAGE>

practice receives a predetermined amount per patient per month in exchange for
providing certain necessary covered services to members of the plan. Usually,
the capitated plans also provide for supplemental payments and/or co-payments by
members for certain higher cost procedures. These contracts typically result in
lower average fees for services than the usual and customary fees charged by the
Company's affiliated dental practices and may, in certain instances, expose the
Company to losses on contracts where the total revenues received are less than
the costs of providing such dental care. The Company generally bears the risk of
such loss because it consolidates the financial results of its affiliated dental
practices. However, most of these contracts are cancelable by either party on 30
to 90 days written notice thereby reducing the risk of long-term adverse impact
on the Company. Fees from capitated contracts totaled $7.4 million, $9.1 million
and $9.6 million in 1999, 2000 and 2001, respectively, including supplemental
payments and excluding co-payments by members. No single contract amounted to a
significant portion of the Company's revenues, as each of the Company's regional
operations contracts separately with managed care providers. The Company
periodically evaluates its capitated managed care contracts by comparing the
average reimbursement per procedure plus the total capitation fees per contract
to the usual and customary fees charged by the affiliated dental practice. As of
December 31, 2001, the Company did not have a loss in the aggregate related to
managed care contracts.

  Accounts receivable consist primarily of receivables from patients, insurers,
government programs and contracts between the affiliated dental practices and
third-party payors for dental services provided by dentists. The Company does
not believe that change in the reimbursement arrangements for its affiliated
dental practice contracts with third-party payors would have a material impact
on revenues. An allowance for doubtful accounts is recorded by the Company based
on historical experience and collection rates.

  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 allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 2001 are 25 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.

  The Company carries insurance with coverages and coverage limits that it
believes to be customary in the dental industry. Although there can be no
assurance that such insurance will be sufficient to protect the Company against
all contingencies, management believes that its insurance protection is
reasonable in view of the nature and scope of the Company's operations.

  The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will

                                       23
<PAGE>

not have a material adverse effect on the Company's financial position, results
of operations or liquidity.

Inflation

  Inflation has not had a significant impact on the results of operations of the
Company during the last three years.

Recent Accounting Pronouncements

  On July 20, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB
Opinion No. 16, Business Combinations, to prohibit use of the pooling-of-
interest (pooling) method of accounting for business combinations initiated
after the issuance date of the final Statement. SFAS No. 142 supercedes APB
Opinion No. 17, Intangible Assets, by stating that goodwill will no longer be
amortized, but will be tested for impairment in a manner different from how
other assets are tested for impairment. SFAS No. 142 establishes a new method of
testing goodwill for impairment by requiring that goodwill be separately tested
for impairment using a fair value approach rather than an undiscounted cash flow
approach.

  The provisions of SFAS No. 141 and SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 must be adopted at the
beginning of a fiscal year. The Company is currently evaluating the impact of
the adoption of these Statements.

  On August 16, 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligation".  SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. These
provisions of SFAS 143 are effective for financial statements issued for fiscal
years beginning after June 15, 2002.  Earlier application is encouraged.

  On October 3, 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".  SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets.  This Statement supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", both of which address the disposal of a segment of a business.

  The provisions of SFAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years, with early application encouraged.  The Company is currently
evaluating the impact of the adoption of this Statement but does not believe it
will have a material impact on the Company's net income, cash flows, or
financial condition.

Item 7A. Quantitative And Qualitative Disclosures About Market Risk

  The Company's financial instruments with market risk exposure are revolving
credit borrowings under its Debt Agreements that total $60.2 million at December
31, 2001. Based on this balance, a change of one percent in the interest rate
would cause a change in interest expense of approximately $602,000, or $0.09 per
share, on an annual basis. The bank credit facility was not entered into for
trading purposes and carries interest at a pre-agreed upon percentage point
spread from either the prime interest rate or Eurodollar interest rate.

Item 8. Financial Statements and Supplementary Data

  The financial statements required by this Item 8 are incorporated under Item
14 in Part IV of this Annual Report on Form 10-K.

Item 9.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

  None.

                                       24
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     The following sets forth information as to the current directors and
executive officers of the Company, including their ages, present principal
occupations, other business experience during the last five years, memberships
on committees of the Board of Directors and directorships in other publicly-held
companies.

<TABLE>
<CAPTION>
                                                                                             Director
              Name                Age            Position with the Company                     Since
---------------------------------------------------------------------------------------------------------
    <S>                           <C>    <C>                                                <C>
     James M. Usdan               52     Chief Executive Officer, President and                 2001
                                         Director

     Robert J. Cresci (1)(2)      58     Director                                               1995

     G. Kent Kahle (1)            50     Director                                               1995

     Emmett E. Moore (1)          60     Director                                               1997

     Joseph P. Keane              38     Senior Vice President, Chief Financial
                                         Officer

     John M. Slack                54     Senior Vice President, Chief Administrative
                                         Officer

     Dean A. Clemens              46     Vice President, Chief People Officer

     Tim S. Tiffin                38     Vice President, Chief Information Officer

     Kris A. Kelly                40     Vice President, Marketing & Brand
                                         Management
</TABLE>

  ______________________________
     (1)  Member of the Audit Committee.
     (2)  Member of the Compensation Committee.

Board of Directors

     Robert J. Cresci became a director in December 1995. Mr. Cresci has been a
Managing Director of Pecks Management Partners Ltd., an investment management
firm, since September 1990. Mr. Cresci currently serves on the boards of
Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., j2 Global
Communications, Inc., Candlewood Hotel Co., Inc., SeraCare life Sciences, Inc.,
Learn2 Corporation and several private companies.  Mr. Cresci received his
undergraduate degree from the United States Military Academy at West Point and
received his M.B.A. in finance from Columbia University Graduate School of
Business.

     G. Kent Kahle became a director in December 1995. He has been a Managing
Director of The GulfStar Group, Inc., an investment banking firm, since 1990.
From 1982 to 1990 Mr. Kahle held various positions with Rotan Mosle, Inc., most
recently as Senior Vice President and Director. He currently serves on the board
of Total Safety Corporation, U.S. Legal Support, Inc., and Plassein
International Inc.  Mr. Kahle has an M. B. A. from The Wharton School of the
University of Pennsylvania and an A.B. from Brown University.

     Emmett E. Moore became a director in September 1997. Since June 1999, Mr.
Moore has been Chairman of the Board and Chief Executive Officer of MedEvolve,
Inc., a provider of internet-based information technology solutions to
physicians' offices. From November 1997 until joining MedEvolve, he was engaged
in private consulting and investments related to healthcare. From April 1995
until November 1997, Mr. Moore was the Chairman of the Board and Chief Executive
Officer of Physicians Resource Group, Inc., a publicly traded ophthalmology
practice management company. Mr. Moore received B.B.A., J.D. and M.B.A. degrees

                                       25
<PAGE>

from the University of Texas, and is a certified public accountant.

Executive Officers

     The Board elects executive officers annually at its first meeting following
the annual meeting of stockholders. Information concerning the executive
officers is set forth below.

     James M. Usdan became President, Chief Executive Officer and a director of
the Company in July 2001. From 1998 to 2001, Mr. Usdan was President and CEO of
NextCare Hospitals, Inc., a provider of long-term acute care hospital services.
From 1990 to 1998, Mr. Usdan was President, Chief Executive Officer and a
director of RehabCare Group, Inc., a publicly traded physical therapy,
rehabilitation staffing and other health care outsourcing services. Mr. Usdan
serves on the Boards of Metro 1 Telecommunications, Inc., Physical
Rehabilitation Network and is on the advisory boards of Maryville College and
the Harvard University School of Public Health. Mr. Usdan received a Bachelor of
Arts degree from Harvard College.

     Joseph P. Keane joined the Company as Senior Vice President and Chief
Financial Officer in January 2002. During 2000 and 2001, Mr. Keane was Chief
Financial Officer of Galaxy.com, LLC, a leading vertical internet directory
owned 50/50 by a subsidiary of Fox Entertainment Group and private investors.
During 1997-2000, Mr. Keane held the positions of Deputy Commissioner of the
Tennessee Department of Insurance and also worked as the Director of Internal
Audit for the State of Tennessee.  From 1995 to 1997, Mr. Keane worked for
Columbia/HCA as an analyst involved in government relations, mergers and
acquisitions. Mr. Keane received a Bachelor of Business Administration degree
from East Tennessee University and he is a certified public accountant.

     John M. Slack was appointed Senior Vice President and Chief Administrative
Officer in January 2002.  Mr. Slack joined the Company in December 1995 as Vice
President and Chief Financial Officer.  From November 1994 through November
1995, he served as Vice President and Chief Financial Officer of Team, Inc., a
publicly held environmental services company. From 1985 through August 1994, Mr.
Slack was Vice President and Chief Financial Officer of Serv-Tech, Inc., a
publicly held industrial services company. Mr. Slack received a B.S. in
international economics from Georgetown University in 1969.

     Dean A. Clemens became Vice President and Chief People Officer in October
2001.  From 2000 to 2001, Mr. Clemens was a principal of Sharp Solutions, a
human resources consulting firm specializing in serving technology businesses.
Prior to that, from 1999 to 2000 he was Director of Compensation and Benefits
for PhyCor, Inc., a physician practice management and managed care company.
From 1996 to 1999, he was Director of Human Resources for Behavioral Healthcare
Corporation, an operator of freestanding psychiatric hospitals in 19 states and
Puerto Rico.  Mr. Clemens received a Bachelor of Science degree from Texas A&M
University.

     Tim S. Tiffin became Vice President and Chief Information Officer ("CIO")
in September 2000. From 1998 to 2000 Mr. Tiffin served as Senior Vice President-
Operations and CIO for First National Net, Inc. an international mortgage field
services company. From 1995 to 1998 Mr. Tiffin was CIO of Frontier Engineering,
Inc. a Department of Defense contractor with global operations.

     Kris A. Kelly joined the Company as Vice President, Marketing and Brand
Management in October 2001. From 1998 to 2001, Ms. Kelly was Director of
Marketing for Apple Orthodontix, Inc., a publicly traded practice management
company specializing in orthodontia. From 1993 to 1998, Ms. Kelly was Director
of Marketing for a leading Primedia magazine, Southwest Art. Ms. Kelly received
a Bachelor of Science degree from Oklahoma State University.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons holding more than ten percent of a registered
class of the Company's equity securities to file with the SEC and any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted (i) initial reports of ownership, (ii) reports of changes in
ownership and (iii) annual reports of

                                       26
<PAGE>

ownership of Common Stock and other equity securities of the Company. Such
directors, officers and ten-percent stockholders are also required to furnish
the Company with copies of all such filed reports.

     Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
2001, the Company believes that all of the Company's executive officers and
directors complied with Section 16(a) reporting requirements during 2001.

Item 11.  Executive Compensation

Summary Compensation Table

     The following table provides certain summary information concerning
compensation earned by each person serving as the Company's Chief Executive
Officer at any time during the year ended December 31, 2001 and each of the
other executive officers of the Company (the "Named Executive Officers") whose
compensation exceeded $100,000 during the year ended December 31, 2001.

<TABLE>
<CAPTION>
                                           Annual Compensation                            Long-term Compensation
                                           -------------------                            ----------------------
                                                             Other Annual     Restricted         Number of         All Other
Name and Principal Position   Year     Salary      Bonus     Compensation    Stock Awards     Options Granted    Compensation
---------------------------   ----     ------      -----     ------------    ------------     ---------------    ------------
                                        ($)         ($)           ($)            ($)                                ($)(1)
<S>                           <C>      <C>         <C>       <C>             <C>              <C>                <C>
James M. Usdan (2).........   2001   $ 146,447       ---              ---             ---          325,000                ---
  Chief Executive
  Officer & President

Ira Glazer (3).............   2001          (4)      ---              ---             ---              ---                ---
  Chief Executive
  Officer

Jack H. Castle, Jr. (5)....   2001     257,140       ---              ---             ---              ---             30,835
  Chief Executive             2000     251,790       ---              ---             ---              ---             30,872
  Officer                     1999     249,925       ---              ---             ---           75,000             32,750

John M. Slack..............   2001     150,000       ---              ---             ---              ---              9,912
  Senior Vice President,      2000     150,000       ---              ---             ---              ---              9,912
  Chief Administrative        1999     144,231       ---              ---             ---           50,000              7,407
  Officer
</TABLE>

  (1)  Other compensation paid to Mr. Castle and Mr. Slack in 1999, 2000 and
       2001 consisted of automobile allowances. During this period, Mr. Castle
       also received the benefit for payments on life insurance contracts of
       which he is the owner.
  (2)  Mr. Usdan was appointed as Chief Executive Officer on July 1, 2001.
  (3)  Mr. Glazer served as Chief Executive Officer from February 15, 2001
       through June 30, 2001.
  (4)  Mr. Glazer received no direct compensation from the Company. During the
       period that he served as Chief Executive Officer, his employer, Getzler &
       Co., was paid $400,000 for his services as Chief Executive Officer.
  (5)  Mr. Castle resigned as Chief Executive Officer on February 15, 2001.

                                      27
<PAGE>

Stock Options

     The following table reflects certain information regarding stock options
granted to the Named Executive Officers during 2001.

<TABLE>
<CAPTION>


                                                  Individual Grants
                          ------------------------------------------------------------  Potential Realizable Value at
                                                                                        Assumed Annual Rates of Stock
                            Number of                                                   Price Appreciation for Option
                            Securities     Percent of Total                                          Term
                            Underlying     Options Granted
                             Options         to Employees    Exercise    Expiration
Name                         Granted           in 2001         Price        Date            5% ($)         10% ($)
----                         -------           -------         -----        ----            ------         -------
<S>                       <C>             <C>                <C>         <C>               <C>             <C>
  James M. Usdan             325,000             100.0%        $0.21       7/1/11         $42,922        $108,773
</TABLE>

Aggregate Option Exercises in 2001 and Year-End 2001 Option Values

  The following table reflects certain information concerning the number of
unexercised options held by the Named Executive Officers and the value of such
officers' unexercised options as of December 31, 2001. The Named Executive
Officers exercised no options during the year ended December 31, 2001.

<TABLE>
<CAPTION>
                                                                          Number of              Value of Unexercised
                                                                   Unexercised Options        "In-the-Money" Options
                                Shares                             at December 31, 2001      at December 31, 2001 (1)
                               Acquired                            --------------------     ---------------------------
          Name               on Exercise      Value Realized    Exercisable  Unexercisable  Exercisable   Unexercisable
          ----               -----------      --------------    -----------  -------------  -----------   -------------
<S>                        <C>               <C>                <C>          <C>            <C>           <C>
James M. Usdan...........         0                 $0                    0        325,000       $0             $0
Ira Glazer...............         0                  0                    0              0        0              0
Jack H. Castle, Jr.......         0                  0               37,500         37,500        0              0
John M. Slack............         0                  0              106,500         43,500        0              0
</TABLE>

   (1)  Options are "in-the-money" if the closing market price of the Company's
        Common Stock exceeds the exercise price of the options. The exercise
        price of the options granted to the Named Executive Officers ranges from
        $0.21 to $13.00 per share. None of the options granted to the Named
        Executive Officers were "in-the-money" at December 31, 2001.

Compensation Committee Interlocks and Insider Participation

   In 2001, the members of the Compensation Committee were Elizabeth A. Tilney
and Robert J. Cresci. Ms. Tilney resigned from the board of directors in
February 2001.  Mr. Cresci is a party to certain transactions with the Company.
See "Certain Relationships and Related Transactions."

                                       28
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Principal Stockholders

     The following table sets forth information as of March 31, 2002 with
respect to beneficial ownership of the Company's Common Stock by (i) each
director, (ii) each executive officer that owned the Company's Common Stock,
(iii) the executive officers and directors as a group, and (iv) each person
known to the Company who beneficially owns 5% or more of the outstanding shares
of its voting securities. Unless otherwise indicated, each of the stockholders
has sole voting and investment power with respect to the shares beneficially
owned.

<TABLE>
<CAPTION>
                                                                     Number of        Percentage
                                                                       Shares          of Shares
                                                                    Beneficially     Beneficially
               Name and Address of Beneficial Owner                    Owned             Owned
               ------------------------------------                    -----             -----
<S>                                                                 <C>              <C>
Jack H. Castle, Jr. (1)(2)......................................         1,365,500        21.1%

Jack H. Castle, D.D.S. (2)(3)...................................           974,000        15.2

Loretta Castle (2)(3)...........................................           974,000        15.2

Castle Interests, Ltd. (2)
1360 Post Oak Boulevard,
Suite 1300, Houston, Texas 77056................................           514,000         8.0

Pecks Management Partners, Ltd. (4)
One Rockefeller Plaza, Suite 900
New York, New York 10020........................................           913,243        14.2

Robert J. Cresci (5)............................................           933,243        14.5

Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004........................................           520,599         8.1

James M. Usdan (6)..............................................            90,000         1.4

G. Kent Kahle (7)...............................................            33,750           *

John M. Slack (8)...............................................           121,000         1.9

Emmett E. Moore (9).............................................            20,000           *
                                                                         ---------
All directors and executive officers as a group (7 persons) (10)         2,563,493        38.7%
----------------------------------------------------------------------------------------------
</TABLE>

_______________
 *   Less than 1%
(1)  Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
     Castle, Jr., of which Mr. Castle is Trustee. Includes options to acquire
     37,500 shares of Common Stock issued under the Castle Dental Centers, Inc.
     Omnibus Stock and Incentive Plan (the "Plan"), which are exercisable within
     60 days. Excludes options to acquire 37,500 shares of Common Stock which
     are not exercisable within 60 days.

(2)  Includes 514,000 shares of Common Stock owned of record by Castle Interest,
     Ltd., a Texas limited partnership of which Jack H. Castle, D.D.S., Loretta
     Castle and Jack H. Castle, Jr. are the three general partners. The general
     partners of Castle Interests, Ltd. cannot act to vote or dispose of shares
     of Common Stock held by Castle Interests, Ltd. without the unanimous vote
     of all of the general partners. Loretta Castle is the wife of Jack H.
     Castle, D.D.S. and the mother of Jack H. Castle, Jr.

(3)  Includes 103,000 shares of Common Stock owned jointly by Jack H. Castle,
     D.D.S. and Loretta Castle.

(4)  Includes 615,033, 121,708, and 176,502 shares of Common Stock owned of
     record by Delaware State

                                       29
<PAGE>

     Employees' Retirement Fund, Declaration of Trust for Defined Benefit Plans
     of ICI American Holdings Inc. and Declaration of Trust for Defined Benefit
     Plans of Zeneca Holdings Inc., respectively (the "Pecks Investors"). Pecks
     Management Partners Ltd. ("Pecks"), as investment manager for the Pecks
     Investors, has sole investment and voting power with respect to such
     shares. Mr. Cresci, a director of the Company, is a Managing Director of
     Pecks. Pecks disclaims beneficial ownership of such shares.

(5)  Includes all shares deemed to be beneficially owned by Pecks, of which Mr.
     Cresci is a Managing Director. As a result, Mr. Cresci may be deemed to
     share voting and investment power with respect to such shares. Mr. Cresci
     disclaims beneficial ownership of such shares. See note 4 above. Also
     includes options to acquire 20,000 shares of Common Stock under the
     Directors' Plan which are exercisable within 60 days. Excludes options to
     acquire 5,000 shares of Common Stock which are not exercisable within 60
     days.

(6)  Excludes options to acquire 325,000 shares of Common Stock, which are not
     exercisable within 60 days.

(7)  Includes options to acquire 17,500 shares of Common Stock under the
     Directors' Plan which are exercisable within 60 days. Excludes options to
     acquire 15,000 shares of Common Stock which are not exercisable within 60
     days.

(8)  Includes options to acquire 106,500 shares of Common Stock issued under the
     Plan which are exercisable within 60 days. Excludes options to acquire
     43,500 shares of Common Stock which are not exercisable within 60 days.

(9)  Includes options to acquire 20,000 shares of Common Stock issued under the
     Directors' Plan which are exercisable within 60 days. Excludes options to
     acquire 5,000 shares of Common Stock which are not exercisable within 60
     days.

(10) Includes (i) 714,000 shares of Common Stock held by the Castle 1995 Gift
     Trust f/b/o Jack H. Castle, Jr., (ii) 514,000 shares of Common Stock held
     by Castle Interests, Ltd. and (iii) 913,243 shares of Common Stock
     beneficially owned by the Pecks Investors.

Item 13.  Certain Relationships and Related Transactions

     At December 31, 2001, Jack H. Castle, Jr., the Company's former Chief
Executive Officer and John M. Slack, Senior Vice-President and Chief
Administrative Officer, had outstanding loans in the aggregate amount of $66,000
from the Company.  These loans are repayable over varying periods ranging from
one to five years and bear interest at rates ranging from zero to six percent.

     Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
owns 948,243 shares of Common Stock. Pursuant to the provisions of the
Stockholders Agreement between the Company, Pecks Management Partners Ltd. and
certain members of Jack H. Castle, Jr.'s family, for so long as certain
ownership thresholds with respect to the Common Stock are maintained, the other
shareholders party to such agreement are obligated to vote their shares of
Common Stock in favor of the designee of the Pecks Investors to be a member of
the Company's board of directors and Mr. Cresci is currently such nominee.

     In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Jack H. Castle, D.D.S., a
director of the Company, was the sole owner. In connection with that
transaction, the Company paid Jack H. Castle, D.D.S. $6.0 million in cash and
entered into a Deferred Compensation Agreement with Jack H. Castle, D.D.S.
pursuant to which the Company has agreed to pay Jack H. Castle, D.D.S. $2.6
million in 20 quarterly installments of $131,500 beginning March 1996 and ending
in December 2000. At December 31, 2000 and 2001, the Company has $131,500
payable under this agreement.  No payments were made under the agreement during
2001. Dr. Castle was a co-founder of the Company and served as a director of the
Company until July 2001.

     In connection with the purchase of the stock of Jack H. Castle, D.D.S.,
Inc., the Company also entered into a management services agreement with Jack H.
Castle, D.D.S., P.C., a professional corporation of which Jack H. Castle, D.D.S.
is the sole owner. Pursuant to the management services agreement, Jack H.
Castle, D.D.S., P.C. receives an annual payment of $100,000 for services
performed in connection therewith. The professional

                                       30
<PAGE>

corporation employs or contracts with all of the dental professionals practicing
at the Company's dental offices in Texas under the Management Agreement. The
Company provides the professional corporation with, among other things,
equipment, supplies, support services, non-dental personnel, office space,
management, administration, financial record keeping and reporting services. The
Management Agreement is for a term of 25 years, with automatic renewal
thereafter.

     The Company receives a management fee under the Management Agreement with
Jack H. Castle, D.D.S., P.C. equal to the Company's costs plus a base management
fee and a performance fee. The base management fee is equal to 12.5% of adjusted
gross revenues and the performance fee is equal to the professional
corporation's net income after payment of all other fees and expenses. The
Company's costs include all direct and indirect costs, overhead and expenses
relating to the Company's provision of services to the professional corporation
under the Management Agreement.

     In addition to the Management Agreement with Jack H. Castle, D.D.S., P.C.,
the Company has a contractual right to designate or approve the licensed dentist
or dentists who own the professional corporation's capital stock in the event
Jack H. Castle, D.D.S. becomes ineligible to own such stock.

     The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's former Chairman and former Chief
Executive Officer. The lease agreement relates to the Castle Dental Center
located at 2101 West Loop South in Houston, Texas, a 6,781 square foot
freestanding building. The Company has agreed to pay Goforth, Inc. a minimum
guaranteed rental of $12,000 per month through January 2001 and $13,200 per
month from January 2001 through January 2006. The Company has also agreed to pay
additional rent of approximately $1,600 per month through December 31, 2000 and
approximately $2,500 a month beginning January 1, 2001, for insurance, taxes and
common area maintenance. On March 31, 2002, the Company closed this dental
center and is negotiating the termination of the lease, which runs through
December 2005.

     On March 15, 2002, the Company received a letter from Goforth, Inc., a
company owned by Jack H. Castle, Jr., the former chief executive officer of the
Company, demanding payment of the sum of $228,594 for reimbursement of certain
build-out costs for the dental center located on Goforth's premises. According
to the demand letter, the Company, through its predecessor, agreed in April 1995
to reimburse Goforth for these costs, such amount to be paid on January 1, 2001.
Before the receipt of this demand letter, the board of directors of the Company
and other appropriate Company personnel were not made aware of this alleged
agreement between the Company's predecessor and Goforth and no provision had
been made for this obligation on the books of the Company. The Company believes
that it is not liable for the amounts demanded by Goforth and intends to
vigorously contest any claims brought to enforce this alleged agreement.

     Pursuant to a Registration Rights Agreement dated as of December 18, 1995,
as amended, the Pecks Investors and certain members of Jack H. Castle, Jr.'s
family have been granted certain registration rights by the Company with respect
to the shares of Common Stock owned by them.

                                       31
<PAGE>

     PART IV

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

     (a) (1)  Financial Statements

     The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated:

<TABLE>
<S>                                                                                        <C>
     Report of Independent Accountants.................................................    F-2
     Consolidated Balance Sheets as of December 31, 2000 and 2001......................    F-3
     Consolidated Statements of Operations for the Years Ended December 31, 1999,
        2000 and 2001..................................................................    F-4
     Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
        December 31, 1999, 2000 and 2001...............................................    F-5
     Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
        2000 and 2001..................................................................    F-6
     Notes to Financial Statements.....................................................    F-7
</TABLE>

     (a) (2)  Financial Statement Schedules

     The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
                                                                           Page
                                                                           ----
     Report of Independent Accountants on Financial Statement Schedule...   S-1

     Financial Statement Schedule

        II -- Valuation and Qualifying Accounts..........................   S-2

     All other schedules are omitted because the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.

     (a) (3)  Exhibits

          The exhibits to this report have been included only with the copies of
   this report filed with the Commission. Copies of individual exhibits will
   be furnished to stockholders upon written request to the Company and payment
   of a reasonable fee.

     (b)  Reports on Form 8-K
              NONE

                                       32
<PAGE>

                                   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
Houston, State of Texas on April 15, 2002.

                                     CASTLE DENTAL CENTERS, INC.

                                     By:  /s/  JAMES M.USDAN
                                        ----------------------------------
                                              James M. Usdan
                                            Chief Executive Officer

                               POWER OF ATTORNEY

     We, the undersigned, directors and officers of Castle Dental Centers, Inc.
("Company"), do hereby severally constitute and appoint James M. Usdan and
Joseph P. Keane and each or any of them, our true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001, and to file the same with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys and agents, and each or any of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys and agents, and
each of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

     Pursuant to the requirements of the securities exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

            Signature                   Title                        Date
            ---------                   -----                        ----

       /s/  JAMES M.USDAN      President, Chief Executive        April 15, 2002
    ------------------------
            James M. Usdan     Officer, Director

       /S/ JOSEPH P. KEANE     Senior Vice-President, Chief      April 15, 2002
    ------------------------
           Joseph P. Keane     Financial Officer  (Principal
                               Financial and Accounting
                               Officer)

       /s/ ROBERT J. CRESCI    Director                          April 15, 2002
    ------------------------
           Robert J. Cresci

       /s/  G. KENT KAHLE      Director                          April 15, 2002
    ------------------------
            G. Kent Kahle

       /s/  EMMETT E. MOORE    Director                          April 15, 2002
    ------------------------
            Emmett E. Moore

                                       33
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
                         INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S>                                                                                             <C>
Audited Financial Statements
  Report of Independent Accountants...........................................................   F-2
  Consolidated Balance Sheets as of December 31, 2000 and 2001................................   F-3
  Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001..   F-4
  Consolidated Statements of Changes in Stockholders' Equity for the years ended
     December 31, 1999, 2000 and 2001.........................................................   F-5
  Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001..   F-6
  Notes to Consolidated Financial Statements..................................................   F-7
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Stockholders of Castle Dental Centers, Inc.


     In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Castle Dental
Centers, Inc. at December 31, 2000 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States 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.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
negative working capital, and is under default on the Company's senior and
subordinated debt agreements. In addition, at December 31, 2001, the Company had
$63.7 million of notes payable that were either due on or before March 31, 2001,
or subject to acceleration.  Management's plans concerning these matters are
also discussed in Note 1.  The uncertainties associated with these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include adjustments that might
result from the outcome of this uncertainty.


                                 PricewaterhouseCoopers LLP


April 5, 2002

                                      F-2
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                           ------------------------------
                                                                                              2000                 2001
                                                                                           ----------           ---------
<S>                                                                                        <C>                  <C>
                                   ASSETS
Current assets:
 Cash and cash equivalents....................................................              $    901            $  3,979
 Patient receivables, net of allowance for uncollectible accounts of
  $12,041 and $13,555 in 2000 and 2001, respectively..........................                 8,912               4,810
 Unbilled patient receivables, net of allowance for uncollectible accounts of
  $738 and $717 in 2000 and 2001, respectively................................                 2,952               2,869
 Prepaid expenses and other current assets....................................                 1,894               1,373
                                                                                           ----------           ---------
      Total current assets....................................................                14,659              13,031
                                                                                           ----------           ---------
 Property and equipment, net..................................................                18,079              14,746
 Intangibles, net.............................................................                60,248              54,994
 Other assets.................................................................                 2,400               1,311
                                                                                           ----------           ---------
      Total assets............................................................              $ 95,386            $ 84,082
                                                                                           ==========           =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Current portion of long-term debt............................................              $ 63,679            $ 63,759
 Accounts payable and accruedliabilities......................................                13,107              16,983
 Deferred compensation payable, related party.................................                   132                 132
                                                                                           ----------           ---------
      Total current liabilities...............................................                76,918              80,874
                                                                                           ----------           ---------

Long-term debt, net of current portion........................................                   429                  16
Commitments and contingencies
Stockholders' equity:
 Common stock, $.001 par value, 19,000,000 shares authorized, 6,417,206 shares
  issued and outstanding......................................................                     6                   6
 Additional paid-in capital...................................................                42,086              42,086
 Accumulated deficit..........................................................               (24,053)            (38,900)
                                                                                           ----------           ---------
      Total stockholders' equity..............................................                18,039               3,192
                                                                                           ----------           ---------
      Total liabilities and stockholders' equity..............................              $ 95,386            $ 84,082
                                                                                           ==========           =========
</TABLE>

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

                                      F-3
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                              -------------------------------------------------
                                                                                  1999              2000               2001
                                                                              --------------   --------------   ---------------
<S>                                                                           <C>              <C>              <C>
Net patient revenues................................................            $102,701         $ 106,023           $ 97,924
Expenses:
  Dentist salaries and other professional costs.....................              26,984            28,384             27,091
  Clinical salaries.................................................              21,408            20,795             19,956
  Dental supplies and laboratory fees...............................               9,641            11,730             11,760
  Rental and lease expense..........................................               6,203             7,608              6,433
  Advertising and marketing.........................................               3,650             3,847              3,283
  Depreciation and amortization.....................................               5,792             6,796              6,593
  Other operating expenses..........................................               6,154             7,344              8,016
  Bad debt expense..................................................               4,160            15,325              4,948
  Restructuring costs and other charges.............................                   -                 -              2,329
  General and administrative........................................              10,909            13,128             11,291
  Asset impairment..................................................                   -             3,567              2,929
                                                                               ---------         ---------          ---------
   Total expenses...................................................              94,901           118,524            104,629
                                                                               ---------         ---------          ---------
  Operating income (loss)...........................................               7,800           (12,501)            (6,705)
  Litigation settlement.............................................               1,366             1,495                  -
  Interest expense..................................................               4,369             7,751              7,960
  Other (income) expense............................................                  34               (28)               (68)
                                                                               ---------         ---------          ---------
  Income (loss) before provision (benefit) for income taxes
   and cumulative effect of change in accounting principle..........               2,031           (21,719)           (14,597)
  Provision (benefit) for income taxes..............................                 835            (2,595)                 -
                                                                               ---------         ---------          ---------
  Income (loss) before cumulative effect of.........................
   change in accounting principle...................................               1,196           (19,124)           (14,597)
  Cumulative effect of change in accounting principle...............                   -                 -               (250)
                                                                               ---------         ---------          ---------
  Net income (loss).................................................            $  1,196         $ (19,124)          $(14,847)
                                                                               =========         =========          =========
  Income (loss) per common share:
   Income (loss) before cumulative effect of
    change in accounting principle..................................            $   0.18         $   (2.96)          $  (2.27)
   Cumulative effect of change in accounting principle..............                   -                 -              (0.04)
                                                                               ---------         ---------          ---------
   Net income (loss)................................................            $   0.18         $   (2.96)          $  (2.31)
                                                                               =========         =========          =========
  Weighted average number of common and
  common equivalent shares outstanding
   Basic............................................................               6,825             6,451              6,417
                                                                               =========         =========          =========
   Diluted..........................................................               6,850             6,451              6,417
                                                                               =========         =========          =========
</TABLE>

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

                                      F-4
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                       (in thousands, except share data)


<TABLE>
<CAPTION>
                                                  Common Stock              Additional
                                           ----------------------------      Paid-in         Accumulated       Stockholders'
                                              Shares          Amount         Capital           Deficit            Equity
                                           ------------  --------------  ---------------  -----------------  -----------------
<S>                                        <C>           <C>             <C>              <C>                <C>
Balance, January 1, 1999................    6,417,206       $      6         $  42,516       $   (6,125)         $   36,397
  Exchange of consideration for
   acquisition..........................            -              -              (430)               -                (430)
  Net income............................            -              -                 -            1,196               1,196
Balance, December 31, 1999..............    6,417,206              6            42,086           (4,929)             37,163
  Net loss..............................            -              -                 -          (19,124)            (19,124)
Balance, December 31, 2000..............    6,417,206              6            42,086          (24,053)             18,039
  Net loss..............................            -              -                 -          (14,847)            (14,847)
Balance, December 31, 2001..............    6,417,206       $      6         $  42,086       $  (38,900)         $    3,192
</TABLE>

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

                                      F-5
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                             -----------------------------------------------
                                                                               1999                2000               2001
                                                                             --------           ---------          ---------
<S>                                                                          <C>                <C>                <C>
Cash flows from operating activities:
Net income (loss)........................................................    $  1,196           $ (19,124)         $ (14,847)
 Adjustments:
  Provisions for bad debts...............................................       4,160              15,325              4,948
  Depreciation and amortization..........................................       5,792               6,796              6,593
  Amortization of loan cost..............................................         149                 412                567
  Minority  interest.....................................................          51                   -                  -
  Deferred income taxes..................................................         816              (3,133)                 -
  Cumulative effect of change in accounting principle....................           -                   -                250
  Asset Impairment.......................................................           -               3,567              2,929
  Changes in operating assets and liabilities:
   Patient receivables...................................................     (10,142)             (5,141)              (867)
   Unbilled patient receivables..........................................      (1,662)               (453)               104
   Prepaid expenses and other current assets.............................      (1,293)              1,971                521
   Other assets..........................................................      (1,372)               (315)               614
   Accounts payable and accrued liabilities..............................       1,931               3,970              3,626
   Deferred compensation payments, related party.........................        (526)               (394)                 -
                                                                             --------           ---------          ---------
    Net cash provided by (used in) operating activities..................        (900)              3,481              4,438
                                                                             --------           ---------          ---------
Cash flows used in investing activities:
 Capital expenditures....................................................      (9,503)             (3,304)              (910)
 Acquisition of affiliated dental practices, net of cash acquired........        (667)             (5,038)                 -
 Non-competition agreements..............................................        (205)                  -                  -
                                                                             --------           ---------          ---------
    Net cash used in investing activities................................     (10,375)             (8,342)              (910)
                                                                             --------           ---------          ---------
Cash flows from financing activities:
 Proceeds from debt......................................................      11,460              16,870                  -
 Repayment of debt.......................................................      (1,478)             (9,066)              (358)
 Bank overdraft..........................................................         818                (818)                 -
 Debt issuance costs.....................................................        (161)             (1,283)               (92)
                                                                             --------           ---------          ---------
    Net cash provided by (used in) financing activities..................      10,639               5,703               (450)
                                                                             --------           ---------          ---------
Net change in cash and cash equivalents..................................        (636)                842              3,078
Cash and cash equivalents, beginning of period...........................         695                  59                901
                                                                             --------           ---------          ---------
Cash and cash equivalents, end of period.................................    $     59           $     901          $   3,979
                                                                             ========           =========          =========
</TABLE>

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

                                      F-6
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Going Concern Basis

    The accompanying consolidated financial statements of the Company have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $19.1 million in 2000 and $14.8 million in 2001
and, as a result, has not been in compliance with the financial covenants of its
debt agreements since June 30, 2000. At December 31, 2001, approximately $45.2
million in senior debt and $15.0 million in subordinated debt were outstanding
under its debt agreements in addition to approximately $3.5 million in other
outstanding subordinated debt. Since the Company is in default under these
agreements, all amounts outstanding are subject to acceleration and have been
classified as current liabilities. The Company has continued to pay interest
(other than cumulative default interest of $1.3 million classified as current)
on the amounts outstanding under its senior credit facility, but has not made
scheduled principal payments of $11.3 million as of March 31, 2002 under its
senior credit facility, nor made interest or principle payments of $5.8 million
owed to subordinated creditors since July 2000. The Company has requested a
forbearance of scheduled principal payments and is negotiating with its lenders
to restructure the debt agreements. However, these negotiations have not
resulted in a forbearance agreement or restructuring of the debt. The Company
also has current liabilities, exclusive of its bank and subordinated
indebtedness, in excess of its current assets at December 31, 2001. Given the
financial position of the Company and the current condition of financial
markets, the Company believes that it is unlikely that either a new lender group
will be brought in to replace the existing lender group or that an equity
investment by a third party in the Company will be obtained that would be
sufficient to satisfy its capital needs.

    During 2001, the Company implemented a plan to allow it to continue to
operate without the need for additional borrowings. Components of this plan
included: (i) reorganization of field management to improve efficiency and
reduce regional overhead costs; (ii) reduction in corporate general and
administrative costs through job eliminations and reduction in other overhead
expenses; (iii) closing of unprofitable and under- performing dental centers;
(iv) realignment of accounts receivable management to focus on improved
collection of insurance and patient receivables; (v) restructuring of
compensation for management to emphasize performance-based incentives; and (vi)
cancellation of further de novo development and reducing capital expenditures to
maintenance levels. For 2002, management plans to focus on: (i) increased hiring
of new dentists and improving dentist retention; (ii) continuing to monitor and
close unprofitable and under performing dental centers; (iii) refurbishing and
modernizing existing dental centers within capital expenditure constraints of
$1.5 million; (iv) upgrading dental office management personnel; and (v)
improving patient services in order to increase patient retention rates.

    However, there can be no assurance that these efforts to improve operating
results and cash flows will be sufficient to allow the Company to meet its
obligations in a timely manner or that the Company's creditors will agree with
the plan.  Therefore, there is substantial doubt about the Company's ability to
continue in existence. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue in existence.

    Corporate Organization and Basis of Presentation

    Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida, California and
Tennessee ("affiliated dental practices") under long-term management services
agreements.

    The consolidated financial statements include the accounts of the Company
and all wholly-owned and beneficially-owned subsidiaries and the accounts of
affiliated dental practices in which the Company has a long-term controlling
financial interest. Because of corporate practice of medicine laws in the states
in which

                                      F-7
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


the Company operates, the Company does not own dental practices but instead
enters into exclusive long-term management services agreements ("Management
Services Agreements") with professional corporations that operate the dental
practices. In addition, the Company has the contractual right to designate, upon
the occurrence of certain events, the licensed dentist who is the majority
shareholder of the capital stock of the professional corporation at a nominal
cost ("nominee arrangements"). At December 31, 2001, all of the affiliated
dental practices were owned by dentists with whom the Company had a nominee
arrangement. Under the Management Services Agreements, the Company establishes
annual operating and capital budgets for the professional corporations and
compensation guidelines for the licensed dental professionals. The Management
Services Agreements have initial terms of twenty-five years. The management fee
charged by the Company to an affiliated dental practice is intended to reflect
and is based on the fair value of the management services rendered by the
Company to the affiliated dental practice. Subject to applicable law, the
management fee earned by the Company, except from professional corporations
located in California, is generally comprised of three components: (i) the costs
incurred by it on behalf of the affiliated dental practice; (ii) a base
management fee ranging from 12.5% to 20.0% of net patient revenues; and, (iii) a
performance fee equal to the net patient revenues of the affiliated dental
practice less (a) the expenses of the affiliated dental practice and (b) the sum
of (i) and (ii), as described in the agreements.

  In California, the Company is paid a monthly management fee comprised of two
components: (i) the costs incurred by it on behalf of the affiliated dental
practice and (ii) a management fee in an amount ranging from 15.0% to 30.0% of
net patient revenues.  With respect to certain professional corporations in
California, the  Company is paid a bonus equal to 30% of net patient revenues in
excess of average monthly net patient revenues over the prior two-year period.
The amount of the management fee is reviewed by the Company and the affiliated
dental practice at least annually in order to determine whether such fee should
be adjusted to continue to reflect the fair value of the management services
rendered by the Company.

  Through the management services agreements and the nominee arrangements, the
Company has a significant long-term controlling financial interest in the
affiliated dental practices and, therefore, according to Emerging Issues Task
Force Issue No. 97-2, "Application of FASB Statement No. 94, Consolidation of
All Majority-Owned Subsidiaries, and APB No. 16, Business Combinations, to
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Agreements," consolidates the results of the affiliated
practices with those of the Company.  Net patient revenues are presented in the
accompanying statement of operations because the Company must present
consolidated financial statements. All significant intercompany accounts and
transactions, including management fees, have been eliminated in consolidation.

  Revenue Recognition

  Net patient revenues represent the estimated realizable amounts to be received
from patients, third-party payors and others for services rendered by affiliated
dentists. They are reported at established rates reduced by contracted amounts
based on agreements with patients, third party payers and others obligated to
pay for service rendered.  Patient revenues from general dentistry are
recognized as the services are performed. Patient revenues from orthodontic
services are recognized in accordance with the proportional performance method.
Under this method, revenue is recognized as services are performed under the
terms of contractual agreements with each patient. Approximately 25% of the
services are performed in the first month with the remaining services recognized
ratably over the remainder of the contract. Billings under each contract, which
average approximately 26 months, are made equally throughout the term of the
contract, with final payment at the completion of the treatment.

  Net patient revenues include amounts received from capitated managed care
contracts that the Company negotiates on behalf of its affiliated dental
practices. Under capitated contracts the affiliated dental practice receives a
predetermined amount per patient per month in exchange for providing certain
necessary covered services to members of the plan.  Usually, the capitated plans
also provide for supplemental payments and/or co-payments by members for certain
higher cost procedures.  These contracts typically result in lower average fees
for services than the usual and customary fees charged by the Company's
affiliated dental practices and may, in certain instances, expose the Company to
losses on contracts where the total revenues received are less

                                      F-8
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

than the costs of providing such dental care. The Company generally bears the
risk of such loss because it consolidates the financial results of its
affiliated dental practices. However, most of these contracts are cancelable by
either party on 30 to 90 days written notice thereby reducing the risk of long-
term adverse impact on the Company. Fees from capitated contracts totaled $7.4
million, $9.1 million and $9.6 million in 1999, 2000 and 2001, respectively,
including supplemental payments and excluding co-payments by members. One
managed care contract with a national insurance company accounted for $7.2
million in revenues ($3.6 million in capitation payments and $3.6 million in
patient co-payments) in 2001, equal to 7.4% of total net patient revenues. The
Company periodically evaluates its capitated managed care contracts by comparing
the average reimbursement per procedure plus the total capitation fees per
contract to the usual and customary fees charged by the affiliated dental
practice. As of December 31, 2001, the Company did not have a loss in the
aggregate related to Managed Care Contracts.

  Accounts receivable consist primarily of receivables from patients, insurers,
government programs and contracts between the affiliated dental practices and
third-party payors for dental services provided by dentists. The Company does
not believe that change in the reimbursement arrangements for its affiliated
dental practice contracts with third-party payors would have a material impact
on revenues. An allowance for doubtful accounts is recorded by the Company based
on historical experience and collection rates.

  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. Interest is capitalized on the
construction of new centers. Depreciation is provided using the straight-line
method over the estimated useful lives of the various classes of depreciable
assets. Fully depreciated assets are retained in property and equipment until
they are removed from service. Maintenance and repairs are charged to expense
whereas renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations.

  Useful lives for property and equipment are as follows:

  Equipment                         3 - 7 years
  Leasehold improvements            5 -10 years
  Furniture and fixtures            5 - 7 years
  Vehicles                          3 - 5 years

  Management reviews property and equipment whenever events or changes in
circumstances indicate that the carrying value of an asset or group of assets
may not be recoverable on the bases of undiscounted future cash flows.  The
reviews are carried out at the lowest level of assets to which the Company is
able to attribute future cash flows.  The net book value of the underlying
assets is adjusted to their fair value if the sum of the cash flows is less than
the book value

  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 allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 2001 are 25 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

                                      F-9
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


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.

  Other Assets

  Other assets consist primarily of debt issuance costs, deposits and other
receivables. The costs related to the issuance of debt are capitalized and
amortized into interest expense using the straight-line method, which
approximates the interest method, over the term of the related debt. Accumulated
amortization was $0.7 million and $1.2 million as of December 31, 2000 and 2001,
respectively.  Other assets included $67,500 and $22,500 at December 31, 2000
and 2001, respectively, for loans made to executive officers (see Note 12).

  Income Taxes

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

  Advertising

  Costs incurred for advertising are expensed when incurred.

  Use of Estimates in the Preparation of the Consolidated Financial Statements

  The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted  in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of net revenue and expenses during the reporting periods.
Actual results could differ from those estimates.

  Recent Accounting Pronouncements

  On July 20, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB
Opinion No. 16, Business Combinations, to prohibit use of the pooling-of-
interest (pooling) method of accounting for business combinations initiated
after the issuance date of the final Statement. SFAS No. 142 supercedes APB
Opinion No. 17, Intangible Assets, by stating that goodwill will no longer be
amortized, but will be tested for impairment in a manner different from how
other assets are tested for impairment. SFAS No. 142 establishes a new method of
testing goodwill for impairment by requiring that goodwill be separately tested
for impairment using a fair value approach rather than an undiscounted cash flow
approach.

  The provisions of SFAS No. 141 and SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 must be adopted at the
beginning of a fiscal year. The Company is currently evaluating the impact of
the adoption of these Statements.

                                      F-10
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     On August 16, 2001, the Financial Accounting Standards Board issued SFAS
143, "Accounting for Asset Retirement Obligation". SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.. These
provisions of SFAS 143 are effective for financial statements issued for fiscal
years beginning after June 15, 2002. Earlier application is encouraged.

     On October 3, 2001, the Financial Accounting Standards Board issued SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", both of which address the disposal of a segment of a business.

     The provisions of SFAS 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, with early application encouraged. The Company is currently
evaluating the impact of the adoption of this Statement but does not believe it
will have a material impact on the Company's net income, cash flows, or
financial condition.

2.  SELECTED BALANCE SHEET INFORMATION:

    The details of certain balance accounts were as follows.

                                                           December 31,
                                                  ---------------------------
                                                      2000          2001
                                                  -------------  ------------
                                                         (in thousands)
     Property and equipment:
      Equipment.................................     $16,362        $16,666
      Leasehold improvements....................      10,399         10,271
      Furniture and fixtures....................       2,498          2,571
      Vehicles..................................         132            161
                                                    --------       --------
        Total property and equipment............      29,391         29,669
      Less accumulated depreciation.............      11,312         14,923
                                                    --------       --------
        Property and equipment, net.............     $18,079        $14,746
                                                    ========       ========


  Depreciation expense was approximately $3.0 million, $4.0 million and $3.8
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Capitalized interest cost was $329,000 for the year ended December 31, 1999.
There were no amounts capitalized during 2000 and 2001.  Fully depreciated
assets in use as of December 31, 2000 and 2001 were approximately $2.5 million
and $4.5 million, respectively.

                                                           December 31,
                                                  ---------------------------
                                                      2000          2001
                                                  -------------  ------------
                                                         (in thousands)
     Intangibles:
       Management services agreements..........     $68,213        $65,379
       Other...................................         355            355
                                                    -------        -------
          Total intangibles....................      68,568         65,734
     Less accumulated amortization                    8,320         10,740
                                                    -------        -------
          Intangibles, net.....................     $60,248        $54,994
                                                    =======        =======


                                      F-11
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


  Amortization expense was approximately $2.8 million, $2.8 million and $2.8
million for the years ended December 31, 1999, 2000 and 2001, respectively.

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                  -----------------------------
                                                                       2000           2001
                                                                  --------------  -------------
                                                                           (in thousands)
<S>                                                               <C>             <C>
   Accounts payable and accrued liabilities:
    Trade.......................................................       2,587           3,113
    Salaries, wages and payroll taxes...........................       2,646           2,641
    Due to patients.............................................       2,543           3,666
    Legal.......................................................       1,487           1,243
    Interest....................................................       3,068           5,552
    Other.......................................................         776             768
                                                                  ----------      ----------
       Total accounts payable and accrued liabilities...........  $   13,107      $   16,983
                                                                  ==========      ==========
</TABLE>


3.  ACQUISITIONS:

  The Company did not make any acquisitions during the year ended December 31,
2001.  In January 2000, the Company entered into a settlement agreement with
Dental Consulting Services, LLC ("DCS"), a 20% shareholder in Castle Dental
Centers of California, LLC.  Pursuant to the terms of the settlement agreement,
the Company acquired the 20% minority interest and a conversion right held by
DCS.  Total consideration paid by the Company was $5.3 million of which $300,000
was paid in November 1999 as a deposit.

   During 1999, certain purchase price allocations were adjusted by
approximately $667,000 to reflect additional information that became available
throughout the year related to acquisitions made in 1998.

  The assets and liabilities have been recorded at their estimated fair values
at the date of acquisition. The aggregate purchase price and related expenses
exceeded the fair market value of net assets, which has been assigned to
management services agreements, included in intangible assets. Patient revenues,
management fees and related costs are included in the consolidated financial
statements from their acquisition dates.

  The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:


<TABLE>
<CAPTION>
                                                                           December 31,
                                                                    -----------------------
                                                                       1999          2000
                                                                    -----------  ----------
                                                                         (in thousands)
<S>                                                                 <C>          <C>
     Prepaid expenses and other current assets.............              -          (334)
     Property and equipment, net...........................              -            15
     Other assets..........................................              -          (305)
     Management services agreements........................            667           274
     Accounts payable and accrued liabilities..............              -          (100)
     Deferred taxes........................................              -         1,275
     Minority interest.....................................              -         4,354
                                                                   -------       -------
                                                                       667         5,179
     Less: issuance of notes payable.......................              -           141
                                                                   -------       -------
       Cash purchase price, net of cash acquired...........        $   667       $ 5,038
                                                                   =======       =======
</TABLE>

                                      F-12
<PAGE>

4.    LONG-TERM DEBT:
      Long-term debt consisted of the following:


                                                          December 31,
                                                 -----------------------------
                                                    2000                2001
                                                 ----------          ---------
                                                         (in thousands)

Revolving credit loans..........................   $ 45,230          $  45,230
Senior subordinated notes.......................     13,622             13,622
Senior subordinated convertible notes...........      1,378              1,378
Subordinated seller notes.......................      3,414              3,425
Other notes payable.............................        464                120
                                                 ----------          ---------
  Total debt....................................     64,108             63,775
Less current portion............................     63,679             63,759
                                                 ----------          ---------
  Long-term debt................................ $      429          $      16
                                                 ==========          =========

     The Company maintains a credit agreement with a bank group (the "Credit
Agreement") that provides for borrowings up to $55.0 million and matures in
November 2002. Advances under the Credit Agreement required quarterly interest
payments only through March 2001 at which time principal became payable
quarterly based on a five-year amortization with final payment at maturity.
Borrowings under the Credit Agreement may at no time exceed a specified
borrowing base, which is calculated as a multiple of the Company's earnings
before interest, income taxes, depreciation and amortization ("EBITDA"), as
adjusted. The bank credit facility bears interest at variable rates, which are
based upon either the bank's base rate or LIBOR, plus, in either case, a margin
which varies according to the ratio of the Company's funded debt to the EBITDA,
each as defined in the Credit Agreement. A commitment fee is payable quarterly
at rates ranging from 0.125 percent to 0.5 percent of the unused amounts for
such quarter. The Credit Agreement contains affirmative and negative covenants
that require the Company to maintain certain financial ratios, limit the amount
of additional indebtedness, limit the creation or existence of liens, set
certain restrictions on acquisitions, mergers and sales of assets and restrict
the payment of dividends. At December 31, 2001, the Company was not in
compliance with the financial covenants of the Credit Agreement. At December 31,
2001, $45.2 million was outstanding under the Credit Agreement and the interest
rate on the Company's bank borrowings was 8.75%, including default interest of
2.0%. In November 2001, the Credit Agreement became a term note, therefore
additional borrowings under the agreement are not available.

     In January 2000, the Company amended the Credit Agreement and entered into
a senior subordinated note agreement ("Subordinated Note Agreement") and a
subordinated convertible note agreement ("Convertible Note Agreement") with two
lenders. The Subordinated Note Agreement and Convertible Note Agreement provide
for borrowings of $13.7 million and $1.3 million, respectively. Loans under the
Subordinated Note Agreement bear interest at the 90-day LIBOR rate plus five and
one-half percent, payable quarterly, and are due in eight quarterly installments
beginning in the sixty-third month following the closing date. Loans under the
Convertible Note Agreement bear interest at the same rate as loans under the
Subordinated Note Agreement and are due on demand beginning seven years after
the closing date with a final maturity date of January 30, 2009. The convertible
note is convertible at any time into 442,880 shares of Company common stock at
the request of the holders at a fixed conversion price of $3.1125 per share. The
Subordinated Note Agreement and Convertible Note Agreement contain affirmative
and negative covenants that require that the Company maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends. At December 31, 2001, the
Company was not in compliance with the financial covenants of the Subordinated
Note Agreement and Convertible Note Agreement.

  The Company has issued various subordinated seller notes payable in connection
with certain acquisitions

                                      F-13
<PAGE>

("Subordinated Seller Notes"). These notes bear interest at varying rates
ranging from 6.0% to 9.0%, require quarterly payments of interest and principal,
and mature at varying dates ranging from June 2000 through June 2002.

     As a result of the losses incurred in 2000 and 2001, the Company has not
been in compliance with the financial covenants of the Credit Agreement,
Subordinated Note Agreement and Convertible Note Agreement ("Debt Agreements")
since June 30, 2000. At December 31, 2001, approximately $45.2 million in senior
debt and $15.0 million in subordinated debt were outstanding under the Debt
Agreements in addition to approximately $3.5 million in other outstanding
subordinated debt. The Company has continued to pay interest (other than
cumulative default interest of $1.3 million) on the amounts outstanding under
the Debt Agreements, but has not made scheduled principal payments of $11.3
million as of March 31, 2002 due under the Credit Agreement, nor made interest
or principle payments of $5.8 million owed to subordinated creditors since July
2000. Since the Company is in default under these agreements, all amounts
outstanding are subject to acceleration and have been classified as current
liabilities. The Company has requested a forbearance of scheduled principal
payments and is negotiating with its lenders to restructure the Debt Agreements.
However, these negotiations have not resulted in a forbearance agreement or
restructuring of the debt. There can be no assurance that the Company's lenders
will consent to forbearance agreement and restructuring necessary to allow the
Company to continue to operate. If the Company and the lenders cannot reach an
agreement, it may be necessary for the Company to seek protection under Chapter
11 of the Bankruptcy Code.

     At December 31, 2001, approximately $0.9 million (net of accumulated
amortization of approximately $1.2 million) of debt issuance costs had been
capitalized in connection with the issuance of the Debt Agreements.

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

          2002.................................. $ 63,759

          2003..................................        8

          2004..................................        8
                                                 ---------
                                                 $ 63,775
                                                 ========


5.   COMMITMENTS AND CONTINGENCIES:

     Lease Commitments

     Future minimum lease payments under non-cancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
2001 (in thousands):

          2002.................................. $  5,401
          2003..................................    5,039
          2004..................................    4,018
          2005..................................    3,262
          2006..................................    2,415
          Thereafter............................    2,349
                                                 --------
          Total minimum lease obligation........ $ 22,484
                                                 ========

     The Company has entered into operating leases for various types of office
equipment and for its building facilities. Certain building facility leases
include rent escalation clauses. Most leases contain purchase and renewal
options at fair market rental values.

                                      F-14
<PAGE>

     Litigation

     In June 2000, the Company recorded litigation expenses of $1,495,000
resulting from an arbitration award against two subsidiaries of the Company in
an arbitration proceeding in Los Angeles, California. The arbitrator found that
the subsidiaries had breached a contractual agreement to acquire a dental
practice and awarded the plaintiffs actual damages and costs of $442,000. In
August 2000, the arbitrator awarded the plaintiffs an additional $666,000 for
attorney fees and costs, resulting in a total judgment of $1,108,000 against the
Company's subsidiaries. This amount, as well as additional legal expenses
incurred by the Company, was included in the litigation expenses recorded in
June 2000. None of the judgment amount awarded to the plaintiffs has been paid
as of April 15, 2002.

     In October 2001, the former owners of Dental Centers of America filed suit
in Bexar County, Texas alleging that the Company breached a letter agreement
offering payment as settlement for past due amounts on two subordinated
promissory notes that were part of the purchase consideration for Dental Centers
of America. In March 2002, the plaintiffs obtained a judgment for $625,000 plus
interest and attorneys' fees, against the Company. The Company is currently
involved in settlement negotiations with the plaintiffs and none of the judgment
award has been paid as of April 15, 2002.

     The Company also is a defendant in two lawsuits with landlords of two
leased properties that were abandoned by the Company in 2001 as part of its
restructuring plan. The leases had remaining terms of 42 and 68 months at
monthly rental rates of $3,800 and $4,700, respectively, at the time the Company
stopped paying rent on the leases. The Company is attempting to negotiate
settlements with the landlords.

     The Company carries insurance with coverages and coverage limits that it
believes to be customary in the dental industry. Although there can be no
assurance that such insurance will be sufficient to protect the Company against
all contingencies, management believes that its insurance protection is
reasonable in view of the nature and scope of the Company's operations.

     The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.

6.   INCOME TAXES

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

                                                       December 31,
                                               --------------------------
                                                  2000              2001
                                               --------------------------
                                                      (in thousands)

Deferred tax assets:
   Net operating loss carryforward..........   $  7,884          $ 12,524
   Litigation settlement....................          -               421
   Allowance for bad debts..................      2,811             4,743
   Other....................................        351               281
                                               --------          --------
      Total deferred assets.................     11,046            17,969
Less valuation allowance....................     (5,214)          (14,138)
                                               --------          --------
                                                  5,832             3,831
                                               --------          --------
Deferred tax liabilities:
   Unbilled receivables.....................     (1,153)           (1,090)
   Management services agreement............     (3,303)           (2,088)
   Property and equipment...................     (1,065)             (397)
   Other....................................       (311)             (256)
                                               --------          --------
                                                 (5,832)           (3,831)
                                               --------          --------
Net deferred tax assets (liabilities).......          -                 -
                                               ========          ========

                                      F-15
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                  -----------------------------------------
                                                                                   1999            2000               2001
                                                                                   ----            ----               ----
                                                                                                (in thousands)
     <S>                                                                          <C>            <C>                <C>
     Current tax provision (benefit):
          Federal......................................................           $  17           $   481            $    -
          State........................................................               2                57                 -
                                                                                  -----           -------            ------
               Total current...........................................              19               538                 -
                                                                                  -----           -------            ------
     Deferred tax provision (benefit):
          Federal......................................................             730            (2,803)                -
          State........................................................              86              (330)                -
                                                                                  -----           -------            ------
               Total deferred..........................................             816            (3,133)                -
                                                                                  -----           -------            ------
     Provision (benefit) for income taxes..............................           $ 835           $(2,595)           $    -
                                                                                  =====           =======            ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                  -------------------------------------------
                                                                                   1999               2000            2001
                                                                                   ----               ----            ----
                                                                                                 (in thousands)
     <S>                                                                           <C>               <C>           <C>
     Tax at U.S. statutory rate (34%).....................................         $ 691             $(7,385)      $ (5,048)
     State income taxes, net of federal tax...............................            81                (869)          (594)
     Nondeductible expenses and other.....................................            63                  65             47
     Change in estimate of net operating loss carryforward................             -                 380         (3,329)
     Valuation allowance..................................................             -               5,214          8,924
                                                                                    ----             -------        -------
     Provision (benefit) for income taxes.................................          $835             $(2,595)       $     -
                                                                                    ====             =======        =======
</TABLE>

     At December 31, 2001, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $34.0 million,
expiring in years from 2016 through 2020. Certain changes in ownership of the
Company, if any, may result in significant limitations in the Company's ability
to utilize these net operating loss carryforwards.

7. STOCK OPTION PLANS:

     The Company grants stock options under the Castle Dental Centers, Inc.
Omnibus Stock and Incentive Plan, a stock-based incentive compensation plan (the
"Employees' Plan"), and the Non-employee Directors' Stock Option Plan (the
"Directors' Plan," together the "Plans") which are described below. 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 Employees' Plan, the Company is authorized to issue 1,050,000
shares of Common Stock pursuant to "Awards" granted to officers and key
employees in the form of stock options and restricted stock. Under the
Directors' Plan, the Company is authorized to issue 150,000 shares of Common
Stock to non-employee directors of the Company.

     There are 738,900 and 75,000 options granted under the Employees' Plan and
the Directors' Plan,

                                      F-16
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

respectively, at December 31, 2001. The Compensation Committee administers the
Plans. 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 four or five-year period, beginning on
the first anniversary of the date of grant.

     Following is a summary of the status of the Company's stock options as of
December 31, 2001 and the changes during the three-year period then ended:

<TABLE>
<CAPTION>
                                                                                 Number of            Weighted
                                                                                Shares  of            Average
                                                                                Underlying            Exercise
                                                                                  Options              Price
                                                                               -------------        -----------
  <S>                                                                          <C>                  <C>
  Outstanding at January 1, 1999.........................................            843,400        $      8.79
  Granted................................................................            252,650               2.57
  Exercised..............................................................                  -                  -
  Forfeited..............................................................            (52,223)              6.23
  Expired................................................................            (13,727)              8.93
                                                                               -------------        -----------
  Outstanding at December 31, 1999.......................................          1,030,100        $      7.27
                                                                               =============        ===========
  Exercisable at December 31, 1999.......................................            287,682        $      9.34
                                                                               =============        ===========

  Granted................................................................             62,500        $      2.91
  Exercised..............................................................                  -                  -
  Forfeited..............................................................            (34,267)              6.33
  Expired................................................................            (27,933)              4.70
                                                                               -------------        -----------
  Outstanding at December 31, 2000.......................................          1,030,400        $      7.01
                                                                               =============        ===========
  Exercisable at December 31, 2000.......................................            490,150        $      8.24
                                                                               =============        ===========

  Granted................................................................            325,000        $      0.21
  Exercised..............................................................                  -                  -
  Forfeited..............................................................           (238,725)              6.97
  Expired................................................................           (302,775)              7.24
                                                                               -------------        -----------
  Outstanding at December 31, 2001.......................................            813,900        $      4.22
                                                                               =============        ===========
  Exercisable at December 31, 2001.......................................            332,839        $      7.77
                                                                               =============        ===========

  Weighted-average fair value of options granted during the year:
  1999...................................................................      $        1.58
  2000...................................................................               1.98
  2001...................................................................               0.17
</TABLE>

     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 with the
following weighted-average assumptions: dividend yield of 0% for each year;
expected volatility of 67.9% for 1999, 79.1% for 2000 and 83.9% for 2001; risk-
free interest rates are 6.1% for 1999, 6.6% for 2000 and 5.4% for 2001; and the
expected lives of the options average five years for 1999 and 2000 and eight
years for 2001.

                                      F-17
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

<TABLE>
<CAPTION>
                                                          Options Outstanding                        Options Exercisable
                                            -----------------------------------------------     -----------------------------
                                              Weighted          Average           Weighted        Number            Weighted
                                               Number          Remaining          Average       Exercisable         Average
                                            Outstanding        Contract           Exercise          at              Exercise
Range of Exercise Price                     at 12/31/01          Life              Price         12/31/01            Price
--------------------------------            -----------       ----------          ---------     -----------        ----------
<S>                                         <C>               <C>                  <C>           <C>               <C>
$0.00 to $ 1.99.................              325,000            9.50              $  0.21              -            $     -
$2.00 to $ 7.99.................              263,650            7.51              $  3.36        144,889            $  3.64
$8.00 to $11.00.................              225,250            5.56              $ 11.00        187,950            $ 10.96
                                            ---------                                           ---------
                                              488,900            7.77              $  4.22        332,839            $  7.77
                                            =========                                           =========
</TABLE>

     Had the compensation cost for the Company's stock-based compensation plans
been determined using the fair value of the options, the net income and diluted
net income per common share for 1999 would approximate $0.8 million or $0.12 per
share; the Company's net loss and diluted net loss per share for 2000 would
approximate $19.5 million, or $3.03 per share; the Company's net loss and
diluted net loss per share for 2001 would approximate $15.0 million, or  $2.34
per share.

8.   EARNINGS PER SHARE:

A reconciliation of the denominators of the basic and diluted shares for the
computation of net income follows.

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                               --------------------------------------
                                                                                1999            2000            2001
                                                                               ------          ------          ------
                                                                                           (in thousands)
<S>                                                                            <C>             <C>             <C>
Shares
     Shares - basic (1)..............................................           6,825           6,451           6,417
         Options and warrants........................................              25               -               -
                                                                               ------          ------          ------
         Shares - diluted............................................           6,850           6,451           6,417
                                                                               ======          ======          ======
</TABLE>

     (1)  1999 and 2000 includes the weighted average of 408,000 shares and
34,000 shares, respectively, of common stock issuable upon the exercise of a
conversion right. This conversion right was terminated in January 2000 when the
Company acquired the minority interest in its California subsidiary.

     Options to purchase an aggregate 604,000 shares of common stock at exercise
prices of $6.00 to $13.00 per share were excluded from the calculation of
diluted earnings per share for 1999 because their effect would have been
antidilutive. Options to purchase an aggregate 1,030,400 shares of common stock
at exercise prices of $2.31 to $13.00 per share were excluded from the
calculation of diluted loss per share for 2000 because their effect would have
been antidilutive. Options to purchase an aggregate 813,900 shares of common
stock at exercise prices of $0.21 to $13.00 per share were excluded from the
calculation of diluted loss per share for 2001 because their effect would have
been antidilutive.

     A warrant to purchase 56,579 shares of common stock at $11.00 per share was
excluded from the calculation of diluted earnings per share for 1999 and 2000
because its effect would have been antidilutive. The warrant expired in December
2000.

                                      F-18
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

9.  DEFINED CONTRIBUTION PLANS:

     In August 1996, the Company adopted a defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan").
All permanent employees of the Company are eligible to participate in the 401(k)
Plan upon the completion of three months of service. The Company may match
contributions made by participants under the Plan each year in an amount
determined by the Company on a year-to-year basis.  The Company did not make any
contributions to the Plan in 1999, 2000, or 2001.

10. SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                         ----------------------------------------
                                                                                             1999           2000           2001
                                                                                         -----------   -------------   ----------
                                                                                                      (in thousands)
     <S>                                                                                 <C>          <C>              <C>
     Cash paid during the period for:
      Interest..................................................................            $3,997         $5,068         $4,909
      Income taxes..............................................................               595            294              -
     Supplemental disclosure of noncash investing and financing activities:
      Acquisition stock guarantee payment accrual...............................               430              -              -
      Acquisition of property and equipment with note  payable..................                 -              -             25
</TABLE>

11. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

Credit Risk

     The Company grants customers credit in the normal course of business. The
Company does not require collateral on the extension of credit. Procedures are
in effect to monitor the creditworthiness of customers and appropriate
allowances are made to reduce accounts to their net realizable values.

     The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured up to $100,000 by the Federal Deposit
Insurance Corporation. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.

Financial Instruments

     The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and the revolving line of credit
approximate fair value due to the short-term maturities of these instruments.
The carrying amounts of the Company's long-term borrowings as of December 31,
2000 and 2001, respectively, approximate their fair value based on the Company's
current incremental borrowing rates for similar type of borrowing arrangements.

Interest Rate Swaps

     During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," deferred the
implementation of SFAS 133 until the fiscal year ending December 31, 2001.  The
Company implemented SFAS 133 effective January 1, 2001.

     In July 2000, the Company entered into a swap agreement with a bank to
receive variable rate interest payments in exchange for fixed rate interest
payments on original notional amounts of $32.0 million. The amounts exchanged
are based on the notional amounts multiplied by the difference between the fixed
interest

                                     F-19
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

rate and variable interest rate in effect. At December 31, 2000, the fixed
interest rate applicable to this agreement was 7.37% and the variable rate of
interest, based upon a three-month LIBOR rate, was 6.825%. For 2000, the
weighted-average variable rates were subject to change over time as LIBOR
fluctuates. During 2000, the Company was required to pay $52,000 in payments
under the swap agreement.  During the first quarter of 2001, the Company accrued
$0.1 million in additional interest expense under the swap agreement.  The
cumulative effect of accounting change as of January 1, 2001, was a charge of
$0.3 million, or $0.04 per common share, that was reflected in 2001.  The term
of the swap contract expired July 10, 2001.

12.  RELATED PARTY TRANSACTIONS:

     The Company maintains a management services agreement with one of the
Company's affiliated dental practices in Texas pursuant to which the sole
shareholder of the affiliated dental practice, a former member of the Board of
Directors of the Company, receives an annual salary of $100,000 to take actions
necessary to maintain the dental license for the affiliated dental practice in
the state of Texas, for as long as he holds such license and is the sole
shareholder of the practice. The shareholder resigned from the Company's Board
of Directors in July 2001.  Such compensation arrangement was negotiated between
the shareholder and previously unaffiliated investors in the Company.  In 1995,
in connection with the Company's acquisition of the assets of the shareholder's
dental practice, the Company entered into a deferred compensation agreement with
the shareholder pursuant to which the Company agreed to pay the shareholder $2.6
million in 20 quarterly installments of $131,500, beginning March 1996.  As of
December 31, 2000 and 2001, there was $131,500 payable to the shareholder under
the terms of the deferred compensation agreement and there were no payments made
in 2001.

     At December 31, 2000 and 2001, certain executive officers of the Company
had outstanding loans in the aggregate amount of $67,500 and $22,504,
respectively, from the Company. In 2000, the Company recognized compensation
expense and forgave $265,000 in loans to its former president and chief
operating officer. These loans are repayable over varying periods ranging from
one to five years and bear interest at rates ranging from zero to six percent.

     A director of the Company is a Managing Director of Pecks Management
Partners Ltd., the investment advisor to investors owning an aggregate of
913,243 shares of Company common stock. Pursuant to the provisions of the
Stockholders Agreement dated January 30, 2000, for so long as certain ownership
thresholds are maintained with respect to the common stock, the investors have
the contractual right to nominate one member of the Company's Board of
Directors.

     The Company entered into a lease agreement with Goforth, Inc., a company
owned by a former member of the Company's Board of Directors (the "Affiliate").
The member of the Board of Directors was the Chairman of the Board until July
2001 and director until April 8, 2002. The Company has agreed to pay the
Affiliate a minimum guaranteed rental of $12,000 per month through December 2000
and $13,200 per month from January 2001 through January 2006 for rental of a
dental center. The Company has also agreed to pay additional rent of
approximately $1,600 per month through December 31, 2000 and approximately
$2,500.00 per month beginning January 1, 2001, for insurance, taxes and common
area maintenance. The Company paid $174,000 under this agreement during 1999 and
2000 and $197,000 in 2001. On March 31, 2002, the Company closed the dental
center leased from the director and is negotiating the termination of the lease,
which runs through December 2005.

     On March 15, 2002, the Company received a letter from Goforth, Inc., a
company owned by Jack H. Castle, Jr., the former chief executive officer of the
Company, demanding payment of the sum of $228,594 for reimbursement of certain
build-out costs for the dental center located on Goforth's premises. According
to the demand letter, the Company, through its predecessor, agreed in April 1995
to reimburse Goforth for these costs, such amount to be paid on January 1, 2001.
Before the receipt of this demand letter, the board of directors of the Company
and other appropriate Company personnel were not made aware of this alleged
agreement between the Company's predecessor and Goforth and no provision had
been made for this obligation on the books of the Company. The Company believes
that it is not liable for the amounts demanded by Goforth and intends to
vigorously contest any claims brought to enforce this alleged agreement.


13.  ASSET IMPAIRMENT:

     The $3.6 million asset impairment for the year ended December 31, 2000,
results primarily from the closing of six dental offices in Florida, Texas and
California, a charge to reflect the impairment in the value of fixed assets for
eleven under-performing dental offices, and the write-off of related intangible
assets and long-term receivables associated with certain acquisitions.  As a
result, the Company reduced intangible assets by approximately $1.2 million,
leasehold improvements and equipment by approximately $1.7 million, and other

                                     F-20
<PAGE>

                         CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

assets by approximately $0.7 million.

     The $2.9 million asset impairment for the year ended December 31, 2001,
results primarily from the closing of two dental offices in Texas and Tennessee,
a charge to reflect the impairment in value of fixed assets for two under-
performing dental offices and the write-off of intangible assets associated with
certain acquisitions.  As a result, the Company reduced intangible assets by
approximately $2.4 million and leasehold improvements by approximately $0.5
million.

14.  QUARTERLY FINANCIAL DATA (UNAUDITED):


<TABLE>
<CAPTION>
                                                                 First           Second            Third              Fourth
                                                              ----------       ----------       -----------         ----------
                                                                            (in thousands, except per share data)
<S>                                                           <C>           <C>                 <C>                 <C>
2000
  Net patient revenues...................................      $26,530           $26,699          $ 27,115            $25,679
  Operating income (loss)................................        1,944             1,705           (10,642)            (5,508)
  Net income (loss)......................................          312              (911)          (10,513)            (8,012)
  Basic and diluted earnings (loss) per share (1)........      $  0.05           $ (0.14)         $  (1.64)           $ (1.25)

2001
  Net patient revenues...................................      $27,723           $24,504          $ 23,152            $22,545
  Operating income (loss)................................        1,899            (1,545)           (1,130)            (5,929)
  Net loss before cumulative effect of change in
   accounting principle..................................         (291)           (3,686)           (2,891)            (7,729)
  Cumulative effect of change in accounting principle....         (250)                -                 -                  -
  Net loss...............................................         (541)           (3,686)           (2,891)            (7,729)
  Basic and diluted earnings per share (1)...............
   Net loss before cumulative effect of change in
    accounting principle.................................      $ (0.05)          $ (0.57)         $  (0.45)           $ (1.20)
   Cumulative effect of change in accounting principle...        (0.04)               --                --                 --
                                                              ----------       ----------       -----------         ----------
   Net loss..............................................      $ (0.09)          $ (0.57)         $  (0.45)           $ (1.20)
                                                              ==========       ==========       ===========        ===========
</TABLE>

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

15.  OPERATING SEGMENTS:

     Financial information is provided below for each of the Company's operating
regions. The Company measures the performance of its regional operations
primarily based on net patient revenues and operating income.  There are no
inter-regional revenues.  The Company's primary measures of profit by which it
formulates decisions and communicates to investors and analysts are net income
and earnings per share.  Financial information internally reported for the
Company for the years ended December 31, 1999, 2000 and 2001 is as follows:

                                     F-21
<PAGE>

                          CASTLE DENTAL CENTERS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                            ----------------------------------------------
                                                                               1999              2000              2001
                                                                            ----------        ----------        ----------
                                                                                           (in thousands)
<S>                                                                         <C>            <C>                  <C>
Net patient revenues:
    Texas......................................................              $ 68,362          $ 70,948          $ 66,201
    Florida....................................................                12,142            11,348            11,092
    Tennessee..................................................                10,236            12,592            11,017
    California.................................................                11,961            11,135             9,614
                                                                            ----------        ----------        ----------
    Total net patient revenues.................................              $102,701          $106,023          $ 97,924
                                                                            ----------        ----------        ----------

Operating expenses:
    Texas......................................................              $ 59,406          $ 74,462          $ 62,088
    Florida....................................................                11,607            13,271            13,034
    Tennessee..................................................                 9,276            12,563            10,372
    California.................................................                10,387            10,346             8,915
    Corporate, general and administrative expenses.............                 4,225             7,882             7,891
    Restructuring costs and other charges......................                     -                 -             2,329
                                                                            ----------        ----------        ----------
    Total operating expenses...................................              $ 94,901          $118,524          $104,629
                                                                            ----------        ----------        ----------

Operating income (loss):
    Texas......................................................                 8,956            (3,514)            4,113
    Florida....................................................                   535            (1,923)           (1,942)
    Tennessee..................................................                   960                29               645
    California.................................................                 1,574               789               699
    Corporate, general and administrative expenses.............                (4,225)           (7,882)           (7,891)
    Restructuring costs and other charges......................                     -                 -            (2,329)
                                                                            ----------        ----------        ----------
    Total operating income (loss)..............................                 7,800           (12,501)           (6,705)
Litigation settlement..........................................                 1,366             1,495                 -
Interest expense...............................................                 4,369             7,751             7,960
Other (income) expense.........................................                    34               (28)              (68)
                                                                            ----------        ----------        ----------
Income (loss) before provision (benefit) for income taxes
 and cumulative effect of change in accounting principle.......              $  2,031          $(21,719)         $(14,597)
                                                                            ==========        ==========        ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                              ----------------------------
Assets:                                                                                          2000              2001
                                                                                              ----------        ----------
    <S>                                                                                       <C>               <C>
    Texas......................................................                                $ 53,680          $ 49,097
    Florida....................................................                                   9,579             6,700
    Tennessee..................................................                                   8,025             6,900
    California.................................................                                  20,954            19,193
                                                                                              ----------        ----------
       Total assets for reportable segments....................                                  92,238            81,890
    Other unallocated amounts..................................                                   3,148             2,192
                                                                                              ----------        ----------
       Total assets............................................                                $ 95,386          $ 84,082
                                                                                              ==========        ==========
</TABLE>

                                     F-22
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:

  Our report on the consolidated financial statements of Castle Dental Centers,
Inc. is included on page F-2 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related consolidated
financial statement schedule listed in item 14(a) in this Form 10-K.

  In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included herein.



                                      PricewaterhouseCoopers LLP

Houston, Texas
April 5, 2002

                                      S-1
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                (In thousands)
<TABLE>
<CAPTION>
                                                  Balance                                                        Balance
 Patient Receivables:                           Beginning    Charged To                                         At End
                                                 Of Year      Expenses     Deductions         Other             Of Year
                                               ----------   -----------   -----------         -----            ---------
 <S>                                           <C>          <C>           <C>                <C>               <C>
 Year ended December 31, 1999:
   Allowance for uncollectible accounts -
     patient receivables.....................     $ 8,508       $ 3,914       $     -         $1,166  /(1)(2)/  $13,588
                                                 ========     =========      ========        ========           ========
 Year ended December 31, 2000:
    Allowance for uncollectible accounts -
     patient receivables.....................     $13,588       $13,157       $15,033         $  329  /(2)/     $12,041
                                                =========    ==========     =========        =======            ========
 Year ended December 31, 2001:
  Allowance for uncollectible accounts -
     patient receivables.....................     $12,041       $ 4,897       $ 3,290         $  (93) /(2)/     $13,555
                                                =========    ==========     =========        =======            ========

 <CAPTION>

                                                 Balance                                                        Balance
 Unbilled Patient Receivables:                  Beginning    Charged To                                          At End
                                                 Of Year      Expenses     Deductions         Other/(1)/        Of Year
                                               ----------   -----------   -----------         -----            ---------
 <S>                                           <C>          <C>           <C>                <C>               <C>
 Year ended December 31, 1999:
   Allowance for uncollectible accounts -
     unbilled patient receivables.............    $   658       $   246       $     -         $    -             $   904
                                                =========    ==========     =========        =======            ========

 Year ended December 31, 2000:
   Allowance for uncollectible accounts -
     unbilled patient receivables.............    $   904       $ 2,168       $ 2,334         $    -             $   738
                                                =========    ==========     =========        =======            ========

 Year ended December 31, 2001:
   Allowance for uncollectible accounts -
     unbilled patient receivables.............    $   738       $    51       $     -         $  (72)/(3)/       $   717
                                                =========    ==========     =========        =======            ========
</TABLE>

 (1) Acquired allowances for uncollectible accounts of affiliated dental
  practices.
 (2) Adjustments to patient accounts that are charged to the allowance for
  doubtful accounts.
 (3) Adjustment to write off vendor discounts no longer available.

                                      S-2
<PAGE>

(a)(3) Exhibits

   Exhibit
   Number           Description of Exhibit
   ------           ----------------------

   3.1     --  Amended and Restated Certificate of Incorporation of Castle
               Dental Centers, Inc.,.

  *3.2     --  Bylaws of Castle Dental Centers, Inc.

  *3.3     --  Amendment to Bylaws of Castle Dental Centers, Inc. dated August
               16, 1996.
  *4.1     --  Form of Certificate representing the Common Stock, par value
               $.001 per share, of Castle Dental Centers, Inc.
  *4.2     --  Registration Rights Agreement dated December 18, 1995, among
               Castle Dental Centers, Inc. and Delaware State Employees'
               Retirement Fund, Declaration of Trust for Defined Benefit Plan of
               ICI American Holdings, Inc., Declaration of Trust for Defined
               Benefit Plan of Zeneca Holdings, Inc. and certain stockholders
               and investors in the Company.
   4.3     --  Stockholders Agreement dated as of January 31, 2000, by and among
               Castle Dental Centers, Inc., Heller Financial, Inc., Midwest
               Mezzanine Fund II, L.P., and certain stockholders and investors
               in the Company. (Incorporated by reference from the Company's
               Form 10-K dated as of March 31, 2000)
   4.4     --  Registration Rights Agreement dated as of January 31, 2000, by
               and among Castle Dental Centers, Inc., Heller Financial, Inc.,
               Midwest Mezzanine Fund II, L.P., and certain stockholders and
               investors in the Company. (Incorporated by reference from the
               Company's Form 10-K dated as of March 31, 2000)
 *10.1     --  Management Services Agreement effective December 18, 1995 by and
               between Castle Dental Centers of Texas, Inc. and Jack H. Castle,
               D.D.S., P.C.
 *10.2     --  Amendment to Management Services Agreement between Castle Dental
               Centers of Texas, Inc. and Jack H. Castle, D.D.S., P.C., dated as
               of August 15, 1996.
 *10.3     --  Indemnity Agreement dated December 18, 1995 by and between Castle
               Dental Centers, Inc. and G. Kent Kahle.
 *10.4     --  Indemnity Agreement dated December 18, 1995 by and between Castle
               Dental Centers, Inc. and Robert J. Cresci.
  10.5     --  Amended and Restated Management Services Agreement dated January
               1, 2000 by and between Castle Dental Centers of Florida, Inc. and
               Castle 1st Dental Care, P.A.
  10.6     --  Management Services Agreement dated February 27, 2001 by and
               between Castle Dental Centers of California, L.L.C. and Schlang
               Dental Corporation.
 *10.7     --  Management Services Agreement effective May 31, 1996 by and
               between Castle Dental Centers of Tennessee, Inc. and Castle Mid-
               South Dental Center, P.C.
 *10.8     --  Amendment to Management Services Agreement between Castle Dental
               Centers of Tennessee, Inc. and Castle Mid-South Dental Center,
               P.C., dated as of August 16, 1996.
 *10.9     --  1996 Castle Dental Centers, Inc. Omnibus Stock and Incentive
               Plan, as amended.
*10.10     --  1996 Castle Dental Centers, Inc. Non-Employee Directors' Plan, as
               amended.
*10.11     --  Lease dated January 1, 1996 by and between Goforth, Inc. and
               Family Dental Services of Texas, Inc.
*10.12     --  Form of Subordinated Promissory Note issued to former members of
               Dental Consulting Services, LLC ("DCS"). (Incorporated by
               reference from the Company's Form 8-K dated as of March 30,
               1998.)
*10.13     --  Form of Subordination Agreement entered into between each former
               member of DCS, Castle and NationsBank of Texas, N.A., as Agent.
               (Incorporated by reference from the Company's Form 8-K dated as
               of March 30, 1998.)
<PAGE>

*10.14  --     Asset Purchase Agreement dated as of December 30, 1998, by and
               among Castle Dental Centers of Texas, Inc., Castle Dental
               Centers, Inc., and Jack H. Castle, D.D.S., P.C., and DCA Limited
               Partnership, L.L.P. ("DCA, Ltd."), Dental Administrators of Texas
               Limited Partnership, L.L.P. ("DAI, Ltd."), Dental Centers of
               America Paymaster P.C. ("Paymaster"), Bandera Road Dental Center,
               P.C. ("Bandera"), Ingram Park Family Dental Center, P.C.
               ("Ingram"), Northeast Family Dental Center, P.C. ("Northeast"),
               Dental Centers of America at Rolling Oaks Mall, PLLC ("Rolling
               Oaks"), San Pedro Family Dental Center, P.C. ("San Pedro"),
               Southpark Family Dental Center, P.C. ("Southpark"), Windsor Park
               Family Dental Center, P.C. ("Windsor"), Dental Centers of America
               at Barton Creek Square Mall, PLLC ("Barton Creek"), Dental
               Centers of America at Lakeline Mall, PLLC ("Lakeline"), Dental
               Centers of America at Hurst Northeast Mall, PLLC ("Hurst"),
               Dental Centers of America at Irving Mall, PLLC ("Irving"), Dental
               Centers of America at Six Flags Mall, PLLC ("Six Flags"), Dental
               Centers of America at Waco, P.C. ("Waco"), Dental Centers of
               America at Mesquite, P.C. ("Mesquite"), Dental Centers of America
               at Sherman, P.C. ("Sherman"), Dental Centers of America at
               Richardson Square Mall, P.C. ("Richardson" and, collectively with
               DCA, Ltd., DAI, Ltd., Paymaster, Bandera, Ingram, Northeast,
               Rolling Oaks, San Pedro, Southpark, Windsor, Barton Creek,
               Lakeline, Hurst, Irving, Six Flags, Waco, Mesquite and Sherman,
               the "DCA Sellers"), Barry E. Solomon, D.D.S., an individual
               living in San Antonio, Texas ("B. Solomon"), Marc A. Solomon, an
               individual living in San Antonio, Texas ("M. Solomon"), Hebron D.
               Cutrer, an individual living in San Antonio, Texas ("Cutrer"),
               Stan E. Faye, an individual living in San Antonio, Texas
               ("Faye"), and Robert B. Grau, an individual living in San
               Antonio, Texas ("Grau", and together with B. Solomon, M. Solomon,
               Cutrer and Faye, the "DCA Shareholders"). (Incorporated by
               reference from the Company's Form 8-K dated as of December 30,
               1998.)
*10.15  --     Form of Subordinated Promissory Note issued to DCA Sellers and/or
               DCA shareholders. (Incorporated by reference from the Company's
               Form 8-K dated as of December 30, 1998.)
*10.16  --     Form of Subordination Agreement entered into between each
               DCA Seller and/or DCA Shareholder receiving a Subordinated
               Promissory Note, Castle Dental and NationsBank, N.A., as Agent.
               (Incorporated by reference from the Company's Form 8-K dated as
               of December 30, 1998.)
*10.17  --     Amended and Restated Credit Agreement dated as of December
               18, 1998, by and among Castle Dental, NationsBank, N.A., as
               agent, and the lenders thereunder. (Incorporated by reference
               from the Company's Form 8-K dated as of December 30, 1998.)
10.18   --     Third Amendment to Amended and Restated Credit Agreement
               dated as of January 20, 2000, by and among Castle Dental
               Centers, Inc., Bank of America, N.A., as agent, and the lenders
               thereunder. (Incorporated by reference from the Company's Form
               10-K dated as of March 31, 2000)
10.19   --     Settlement Agreement dated January 28, 2000, between Castle
               Dental Centers, Inc., Castle Dental Centers of California,
               L.LC., CDC of California, Inc. and the former owners of DCS.
               (Incorporated by reference from the Company's Form 10-K dated
               as of March 31, 2000)
10.20   --     Senior Subordinated Note Purchase Agreement dated as of January
               31, 2000, is among Castle Dental Centers, Inc., Heller Financial,
               and Midwest Mezzanine Fund II, L.P. (Incorporated by reference
               from the Company's Form 10-K dated as of March 31, 2000)
<PAGE>

10.21   --     Form of Subordinated Note issued pursuant to Senior Subordinated
               Note Purchase Agreement dated January 31, 2000. (Incorporated by
               reference from the Company's Form 10-K dated as of March 31,
               2000)
10.22   --     Form of Convertible Subordinated Note issued pursuant to
               Senior Subordinated Note Purchase Agreement dated January 31,
               2000. (Incorporated by reference from the Company's Form 10-K
               dated as of March 31, 2000)
10.23   --     Fourth Amendment to Amended and Restated Credit Agreement
               dated effective as of December 31, 1999, by and among Castle
               Dental Centers, Inc., Bank of America, N.A., as agent, and the
               lenders thereunder. (Incorporated by reference from the
               Company's Form 10-K dated as of  March 31, 2000)
10.24   --     First Amendment to Senior Subordinated Note Purchase
               Agreement dated as of May 19, 2000, by and among Castle Dental
               Centers, Inc., Heller Financial, Inc., and Midwest Mezzanine
               Fund II, L.P. (Incorporated by reference from the Company's Form
               10-K dated as of  March 31, 2000)
21      --     Subsidiaries of the Registrant.
23.1    --     Consent of PricewaterhouseCoopers LLP
   _____________
*  Incorporated herein by reference to the Company's Registration Statement on
   Form S-1 (registration number 333-1335)