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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS

13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number: 1-13263



CASTLE DENTAL CENTERS, INC.

(Exact
Name of Registrant as Specified in Its Charter)



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,
$.000001 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. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes. ̈No. x



The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, was $2.7 million. As of March 29, 2004, issued and outstanding voting stock of Castle Dental Centers, Inc. consisted of 8,265,323 shares of Common Stock,
$.000001 par value; 195,838 shares of Series A-1 Preferred Stock, par value $.000001, convertible into 35,776,356 shares of Common Stock, and; 79,190 shares of Series B Preferred Stock, par value $.000001, convertible into 165,022,853 shares of
Common Stock. The total equivalent shares of Common Stock, issued and outstanding at March 29, 2004, was 209,064,532 shares.



Documents Incorporated by Reference: None



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TABLE OF CONTENTS



|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|Item 1.  |  | Business                                                                                       |  | 1   
|         |  | The Company                                                                                    |  | 1   
|         |  | Recent Developments                                                                            |  | 2   
|         |  | The Dental Industry                                                                            |  | 3   
|         |  | Business Strategy                                                                              |  | 4   
|         |  | Dental Network Development                                                                     |  | 4   
|         |  | Management Services Agreement                                                                  |  | 5   
|         |  | Dentist Employment Agreements                                                                  |  | 6   
|         |  | Services                                                                                       |  | 6   
|         |  | Operations                                                                                     |  | 7   
|         |  | Sales and Marketing                                                                            |  | 8   
|         |  | Managed Care Contracts                                                                         |  | 8   
|         |  | Competition                                                                                    |  | 9   
|         |  | Management Information Systems                                                                 |  | 9   
|         |  | Regulation                                                                                     |  | 9   
|         |  | Employees                                                                                      |  | 12  
|         |  | Corporate Liability and Insurance                                                              |  | 12  
|Item 2.  |  | Properties                                                                                     |  | 12  
|Item 3.  |  | Legal Proceedings                                                                              |  | 12  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 13  
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 14  
|Item 6.  |  | Selected Financial Data                                                                        |  | 15  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 16  
|         |  | Introduction                                                                                   |  | 16  
|         |  | Components of Revenues and Expenses                                                            |  | 16  
|         |  | Results of Operations                                                                          |  | 17  
|         |  | Liquidity and Capital Resources                                                                |  | 22  
|         |  | Critical Accounting Policies                                                                   |  | 23  
|         |  | Inflation                                                                                      |  | 26  
|         |  | Recent Accounting Pronouncements                                                               |  | 26  
|Item 7A. |  | Quantitative And Qualitative Disclosures About Market Risk                                     |  | 27  
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 27  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 27  
|Item 9A. |  | Controls and Procedures                                                                        |  | 27  
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 29  
|Item 11. |  | Executive Compensation                                                                         |  | 32  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 35  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 40  
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 45  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 47  



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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 March 15, 2004, the Company provided management services to 74 dental
centers with approximately 158 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
capitated managed care contracts covering approximately 136,000 members at December 31, 2003. 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. From 2001 through 2003, as part of its restructuring and cost reduction program, the Company
closed, consolidated or sold 26 dental centers, 11 of which were de novo centers that had been built in 1998 and 1999. At March 15, 2004, the Company operated 47, 10, 12 and 5 dental centers in Texas, Tennessee, Florida and California,
respectively.



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Recent Developments



On May 15,
2003, the Company entered into a series of agreements to restructure certain of its outstanding debt and equity (the 2003 Restructuring). As of May 14, 2003, the Company had $46.7 million outstanding under a bank agreement (the Old
Credit Agreement) with its senior secured lenders, a bank group that included, among other banks Bank of America Strategic Solutions, Inc. (BofA) and GE Capital Corporation (GECC), (collectively, the Senior
Secured Lenders), of which $38.3 million was due the Senior Secured Lenders excluding GECC. In addition, at May 14, 2003, the Company had outstanding $1.9 million in principal and accrued interest under 15% convertible notes (Senior
Notes) due Heller Financial, Inc. (Heller), Midwest Mezzanine Fund II, L.P. (Midwest) and the Companys Chief Executive Officer at the time, James Usdan (collectively Senior Subordinated Lenders). The
Restructuring transaction consisted of the following:



| |  | The lenders under the Old Credit Agreement, excluding GECC, accepted payment of approximately $16.4 million in full satisfaction of $38.3 million in principal and $2.0 million in
fees that the Company owed the Senior Secured Lenders. The Company recorded a gain on extinguishment of debt of approximately $21.8 million in the second quarter of 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a credit agreement with GECC, as agent, (Credit Agreement), which includes a $12.5 million term loan and a $3.5 million revolving line of
credit. Borrowings under the Credit Agreement include approximately $8.4 million owed to GECC under the Old Credit Agreement, which amount was rolled over to the Credit Agreement.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Preferred Stock and Subordinated Note Purchase Agreement (Purchase Agreement) with Sentinel Capital Partners II, L.P. (Sentinel),
GECC (as successor to Heller), Midwest and others. Pursuant to this agreement, the Company issued $7.0 million in 20% Subordinated Promissory Notes (Subordinated Notes) and issued 79,190 shares of Series B Convertible Preferred Stock,
par value $0.000001 per share, (Series B Stock). Under the terms of the Purchase Agreement, the issuance and funding of the Series B Stock and Subordinated Notes took place in two closings. In the initial closing on May 15, 2003, the
Company issued $6.7 million in Subordinated Notes for an equal amount of cash and 76,310 shares of Series B Stock for $5.7 million in cash plus the surrender of: (i) $1.9 million in principal and accrued interest due under the Senior Notes; and,
(ii) warrants to purchase approximately 17,974,062 shares of Common Stock. The Senior Notes were recorded net of a discount of $0.3 million, the remaining value assigned to the warrants. In the subsequent closing during the third quarter of 2003,
the Company issued, to key members of management and certain other individuals, the remaining 2,880 shares of Series B Stock for approximately $0.3 million in cash and the $0.3 million in Subordinated Notes for such amount in cash. The Series B
Stock is convertible into an aggregate 165,022,853 shares of Common Stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pursuant to a Warrant Purchase Agreement, the Company acquired from the lenders under the Old Credit Agreement other than GECC, 49,875 warrants to purchase shares of Series A-2
Convertible Preferred Stock, par value $0.00001 (Series A-2 Stock), for an aggregate purchase price of approximately $0.6 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of these transactions, the total equivalent shares of Common Stock, issued and outstanding at December 31, 2003, was 209.1 million. Sentinel
owns more than 50% of the voting stock of the Company and therefore is the controlling stockholder of the Company.



In connection with the 2003 Restructuring, the Company entered into a management agreement with Sentinel (Sentinel Management Agreement),
whereby Sentinel is to provide various strategic financial planning, advisory and consulting services to the Company. In consideration of the services provided by Sentinel, an annual consulting fee of $275,000 is payable quarterly in advance on the
last business day of each February, May, August and November. The consulting fee increases to $300,000 annually after the date that the Companys EBITDA (as defined in the Credit Agreement) exceeds $10.0 million for the preceding twelve months.
Unless earlier terminated by the parties, the Sentinel Management Agreement will remain in effect as long as Sentinel owns stock of the Company. If, during the term of the Sentinel Management Agreement, Sentinel holds less than 50% of the shares of
Company Common Stock held by Sentinel on a fully diluted basis as of May 15, 2003, the fees payable to Sentinel will be prorated based on the number of



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fully diluted shares of Company Common Stock held by Sentinel on such date. Pursuant to the terms of the Sentinel Management Agreement, the Company paid
Sentinel approximately $0.5 million at closing for consulting services related to the 2003 Restructuring.



The Dental Industry



Dental care
services in the United States are 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 2002 Survey of Dental Practice (ADA Survey), in 2002, there were approximately 153,000 actively practicing dentists in the U.S., of
which approximately 8,900 were orthodontists. Nearly 80% of the nations private practitioners work either as sole practitioners or in a practice with one other dentist. Since 1991, the number of dentists practicing in groups has grown from 4%
to 20% of all dentists, as the practice of dentistry becomes more complex and the investment required to open a practice increased. Dental, orthodontic and other specialty practices have followed the trend of the health care industry generally and
are increasingly forming larger group practices.



As the trend
towards consolidation is expected to continue, the number of dentists graduating from dental schools has been falling, from a peak of 6,300 annually in the 1970s to 4,200 in recent years. This is leading to an increase in the average age of
dental practitioners. In addition, the character of the graduating dentist is changing, with women comprising about 40% of graduating classes compared to less than 5% thirty years ago. The combination of increasing demand for dental services and the
slow growth in the number of practicing dentists should result in a positive pricing environment for dental services over the next decade. The tightening supply of dentists will create more competitive recruiting and higher compensation for
qualified dentists.



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 6.1%
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 as employers have added dental benefits to employee
healthcare programs; (ii) an increasing demand for dental services from an aging population as people live longer and retain their teeth throughout their lives; (iii) the evolution of new technology which has made 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 some
form of dental care plan covered 162 million people, or about 57% of the U.S. population in 2000, compared to 47% of the population that had such coverage in 1995. These plans include traditional indemnity insurance, preferred provider
(PPO) plans, capitated managed care (DHMO) plans, and referral plans. Patients covered by indemnity insurance plans typically are charged the same fees for dental services that are charged to uninsured patients, with
insurance generally paying for 50% to 80% of covered procedures. 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 (DHMO) 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. Referral plans are not insurance



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products but are a network-based product that provides dental care at a discounted guaranteed rates and usually charge the subscriber a monthly fee.
According to the NADP, of the estimated 162 million people covered by dental benefits in 2000, approximately 37% were covered by indemnity plans, 34% were covered by PPO plans, 17% were enrolled in capitated managed care programs, including
government (Medicaid) programs and 12% were enrolled in referral plans. The highest growth in dental insurance benefits has come in PPO and referral plans that have increased enrollment from 23 million members in 1995 to 76 million members in 2000.
Growth in managed care plans, on the other hand, slowed in 1997 and enrollment of approximately 27 million members has grown by only 5.3% per year since 1995. Growth in PPO plans should continue as employers switch from traditional indemnity
insurance benefits to lower cost PPO programs. As a result, enrollment in traditional indemnity plans actually decreased by 4.8% per year from 1995.



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-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



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dental centers in 2001, 2002 and 2003. Between January 1, 2001 and December 31, 2003, as part of its restructuring and cost reduction program, the Company
closed, sold or consolidated 26 unprofitable or under performing dental centers, 11 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 $330,000 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, two were closed and three were sold in 2002 and two were closed and one was sold in 2003 as part of the restructuring and cost reduction programs that were
implemented in 2001 and 2002. 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, 2003. The Company anticipates that it will open 2 additional dental centers in 2004, relocate three dental centers into newly built facilities and will
refurbish other dental centers.



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 management fee earned by the Company, except for the professional corporation 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 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 of 30.0% of
net patient revenues; plus a bonus equal to 30.0% of net 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 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.



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,



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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 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, 2003, 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 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 practices 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



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(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 2,400 square feet to 4,000 square feet, and have from six 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 some dental centers opening as early as 8:00 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.



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 to $109 per month, with an average contract period of approximately 26  30 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. The Company maintains 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



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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



Since its
founding, the Company has applied retail-marketing concepts to the practice of dentistry. This strategy has been based on the relatively high level of patient payments (as opposed to insurance and other third-party payers), the discretionary nature
of many procedures such as cosmetic dentistry and orthodontics and the large number of uninsured patients that require dental treatment. These principles include network development and densification within markets, common branding of all dental
centers utilizing the Castle Dentallogo and trademark, extended hours of operation, location optimization, consistent signage, affordable fees and payment plans. The Company uses both print advertising and professionally produced broadcast
advertising to market its dental services to potential patients in its markets. As part of its retail-oriented strategy, the Company seeks to establish or, where appropriate, relocate each of its dental centers in a convenient location in or near a
high-profile neighborhood retail area and utilize 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.



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 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 usual and customary fees charged by
the Company 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. 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.



Because of the rapid growth of capitated managed care plans in the 1990s, the Company increased its participation in such plans by negotiating national agreements with major managed care plans. As a result, the
number of members enrolled at Castle Dental offices increased from 55,000 in 1997 to approximately 172,000 in 2001. As a result of the reduction in dental offices since 2001, and the limits placed on additional managed care enrollment by the
Company, the number of managed care members had fallen to approximately 136,000 by the end of 2003.



At December 31, 2003, the Company and its affiliated dental practices maintained capitated managed care contracts covering approximately 136,000 members.
Capitation fees, including supplemental fees and excluding co-payments by members, totaled $8.2 million, or approximately 8.7% of net patient revenues in 2003. One managed care contract with a national insurance company accounted for $6.5 million in
revenues ($2.8 million in capitation payments and $3.7 million in patient co-payments) in 2003, equal to 6.9% of total net patient revenues. The Company periodically evaluates its capitated managed care contracts by comparing



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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 50% 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 periodically reviews 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.



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 American Dental Partners, Inc., Interdent, Inc., Coast Dental Services, Inc., and Orthodontic Centers of America, 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



The Company uses an integrated dental practice management system in all its dental centers, provided by a third party, that is located 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. The Company also has 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 system allowing for automatic transfer of certain data between the practice management and financial information systems.



In 2004, the Company plans to upgrade and improve its financial information
and accounting systems, convert its purchase order system to a sequel based platform and to determine the feasibility of upgrading its practice management system.



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.



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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 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



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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.



On March 27, 2003, a
Federal District Judge in Dallas, Texas issued a Memorandum Opinion and Order (Opinion) in the case of Robert C. Penny et al vs. Orthalliance, Inc., granting Plaintiffs amended Motion for Partial Summary Judgment. Orthalliance,
Inc. (Orthalliance) is a dental practice management company with similarities in its purpose, organizational structure and management relationships to the Companys. The issuance of this Opinion has potential implications for the
Company since the Opinion held that the management relationship between Orthalliance and certain dentists is in violation of the prohibition against the corporate practice of dentistry as defined in the Texas Dental Practices Act (TDPA)
and is therefore void. Management believes that the Opinion, at this stage, does not significantly increase the risk that the Companys management relationships will be considered illegal. There are material distinctions between the
Companys management arrangements and the Orthalliance arrangements, which would suggest that this or another judge would not reach the same conclusion in applying the law to the Companys arrangements. In addition, the Company is not
currently party to any lawsuits alleging that its business arrangements violate the TDPA. However, the Company can give no assurance that another judge would not apply a similar analysis to its arrangements and hold that such arrangements also
violate the TDPA. Such a ruling against the Company would have material adverse consequences on its financial position and results of operations.



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



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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,
2003, the Company and its affiliated dental practices employed approximately 860 administrative and dental office personnel on a full-time or part-time basis, and the affiliated dental practices employed approximately 165 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
provides each affiliated dental practice with comprehensive general liability, workers compensation and professional liability coverage covering the practice. Each dentist retained or employed by the affiliated dental practice, is required to
provide 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 9,000 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.



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 2003 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
|------- | -----------------



On May 30, 2002, litigation was filed in the Circuit Court for Putnam County, Tennessee against the Company and one of its subsidiaries by the spouse and
children of a patient of an affiliated dental practice alleging that the defendants were negligent and vicariously liable in the care and treatment of the patient, resulting in his death. The Company filed a response to the litigation denying
liability in this matter. The matter was settled in October 2003, within the Companys insurance policy limits. On February 9, 2004,



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Mr. Herrens daughter filed suit in the Circuit Court for Putnam County, Tennessee, seeking an injunction or restraining order preventing the
disbursement of funds from the settlement, and seeking to amend the settlement to reflect that the plaintiff receive her proper share of the settlement, or alternatively, to set the settlement aside and reinstate the original lawsuit. The Company
has filed a response to the lawsuit denying any liability in this matter and intends to vigorously defend itself.



In June 2000, the Company recorded litigation expenses of $1.5 million 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 $1.1 million, plus interest at 10
percent from the date that the judgment was filed. In connection with the restructuring of certain indebtedness in July 2002, the Company entered into a forbearance agreement with the plaintiffs regarding this judgment. The Company agreed to make
the following payments in exchange for forbearance in enforcing the judgment (1) $100,000 interest payment paid in July 2002, (2) twenty-three monthly installments of $30,000 each beginning August 2002 and (3) then $25,000 monthly installments until
paid in full. Pursuant to an Amendment to the forbearance agreement, dated as of May 15, 2003, the plaintiffs consented to GECC filing liens against the Companys assets to secure its obligations under the Credit Agreement and the Company
agreed to increase by $5,000 per month the amounts being paid on the forbearance agreement. The Company entered into a Pay-Off Agreement on November 4, 2003, and made one final payment of approximately $0.5 million in full satisfaction of the
outstanding judgment. Pursuant to the Pay-Off Agreement the Company has been released from all claims under the judgment.



In May 2003, the Company was notified that its former malpractice insurance provider had filed for liquidation and that payment of claims and legal
defense in various malpractice lawsuits filed against the Company and its affiliated dental practices had been terminated. The insolvent insurance company provided malpractice coverage for the Company and its affiliated dental practices in 2000 and
2001. Therefore the Company is potentially liable for payment of any claims, judgments or other costs associated with these lawsuits. Management has reviewed all open claims and lawsuits still pending that this insurance company was covering and
does not believe that the potential liability, if any, will have a material impact on the Companys financial results.



The Company has been informed of an investigation by Texas Medicaid concerning alleged overpayments for services for certain procedures performed by the
Companys affiliated dental practice in Texas. Texas Medicaid has alleged that certain advertised specials were not offered to Medicaid patients from 1997 through 2001. Texas Medicaid has preliminarily claimed overpayments of approximately
$280,000. The Company disputes Texas Medicaids claims and intends to vigorously contest the findings of the Texas Medicaid investigative offices.



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.



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



None



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PART II



|Item 5. | Market For Registrants Common Equity and Related Stockholder Matters
|------- | ---------------------------------------------------------------------



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 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 
|2002:          |  |      |  |     
|First Quarter  |  | 0.13 |  | 0.07
|Second Quarter |  | 0.14 |  | 0.08
|Third Quarter  |  | 0.14 |  | 0.07
|Fourth Quarter |  | 0.09 |  | 0.02
|2003:          |  |      |  |     
|First Quarter  |  | 0.19 |  | 0.05
|Second Quarter |  | 0.29 |  | 0.12
|Third Quarter  |  | 0.45 |  | 0.13
|Fourth Quarter |  | 0.70 |  | 0.31



As of March 15, 2004,
there were 8,265,323 shares of the Companys Common Stock outstanding held by approximately 40 stockholders of record. The Company believes there are approximately 800 beneficial owners of the Common Stock. As of March 15, 2004, there were
195,838 shares of Series A-1 Convertible Preferred Stock, par value $0.000001 (Series A-1 Stock) outstanding held by 6 stockholders of record. The Series A-1 Stock is convertible into 35,776,356 shares of Common Stock. As of March 15,
2004, there were 79,190 shares of Series B Stock outstanding held by 22 stockholders of record. The Series B Stock is convertible into 165,022,853 shares of Common Stock. The Series A-1 Stock and the Series B Stock vote together with the holders of
the common stock on an as-converted basis. The total number of shares of Common Stock outstanding, including the as-converted Series A-1 Stock and Series B Stock, is 209,064,532.



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 Credit Agreement prohibits the payment of dividends.



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|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.



|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                  |  | Year Ended December 31,               |        
|                                                                                                                  |  | 1999                                  |         | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |        
|                                                                                                                  |  | (in thousands, except per share data) |        
|STATEMENT OF OPERATIONS DATA:                                                                                     |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net patient revenues                                                                                              |  | $                                     | 102,701 |      | $ | 106,023 |      |  | $ | 97,924  |   |  | $    | 100,866 |   |  | $ | 93,889  |  
|Expenses:                                                                                                         |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Dentist salaries and other professional costs                                                                     |  |                                       | 26,984  |      |   | 28,384  |      |  |   | 27,091  |   |  |      | 29,376  |   |  |   | 27,634  |  
|Clinical salaries                                                                                                 |  |                                       | 21,408  |      |   | 20,795  |      |  |   | 19,956  |   |  |      | 21,698  |   |  |   | 18,554  |  
|Dental supplies and laboratory fees                                                                               |  |                                       | 9,641   |      |   | 11,730  |      |  |   | 11,760  |   |  |      | 11,607  |   |  |   | 10,342  |  
|Rental and lease expense                                                                                          |  |                                       | 6,203   |      |   | 7,608   |      |  |   | 6,433   |   |  |      | 5,969   |   |  |   | 5,882   |  
|Advertising and marketing                                                                                         |  |                                       | 3,650   |      |   | 3,847   |      |  |   | 3,283   |   |  |      | 2,625   |   |  |   | 2,892   |  
|Depreciation and amortization                                                                                     |  |                                       | 5,792   |      |   | 6,796   |      |  |   | 6,593   |   |  |      | 3,614   |   |  |   | 3,088   |  
|Other operating expenses                                                                                          |  |                                       | 6,154   |      |   | 7,344   |      |  |   | 8,016   |   |  |      | 7,889   |   |  |   | 7,204   |  
|Bad debt expense                                                                                                  |  |                                       | 4,160   |      |   | 15,325  |      |  |   | 4,948   |   |  |      | 4,751   |   |  |   | 3,864   |  
|General and administrative                                                                                        |  |                                       | 10,909  |      |   | 13,128  |      |  |   | 11,291  |   |  |      | 10,217  |   |  |   | 10,250  |  
|Restructuring costs and other charges                                                                             |  |                                       |        |      |   |        |      |  |   | 2,329   |   |  |      | 4,256   |   |  |   | 835     |  
|Asset impairment                                                                                                  |  |                                       |        |      |   | 3,567   |      |  |   | 2,929   |   |  |      | 3,356   |   |  |   |        |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total expenses                                                                                                    |  |                                       | 94,901  |      |   | 118,524 |      |  |   | 104,629 |   |  |      | 105,358 |   |  |   | 90,545  |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating income (loss)                                                                                           |  |                                       | 7,800   |      |   | (12,501 | )    |  |   | (6,705  | ) |  |      | (4,492  | ) |  |   | 3,344   |  
|Litigation settlement                                                                                             |  |                                       | 1,366   |      |   | 1,495   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Interest expense                                                                                                  |  |                                       | 4,369   |      |   | 7,751   |      |  |   | 7,960   |   |  |      | 5,627   |   |  |   | 3,206   |  
|Other (income) expense                                                                                            |  |                                       | 34      |      |   | (28     | )    |  |   | (68     | ) |  |      | (33     | ) |  |   | 52      |  
|Gain on early extinguishment of debt                                                                              |  |                                       |        |      |   |        |      |  |   |        |   |  |      | (17,334 | ) |  |   | (21,856 | )
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle |  |                                       | 2,031   |      |   | (21,719 | )    |  |   | (14,597 | ) |  |      | 7,248   |   |  |   | 21,942  |  
|Provision (benefit) for income taxes                                                                              |  |                                       | 835     |      |   | (2,595  | )    |  |   |        |   |  |      | (161    | ) |  |   | (4,162  | )
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                                          |  |                                       | 1,196   |      |   | (19,124 | )    |  |   | (14,597 | ) |  |      | 7,409   |   |  |   | 26,104  |  
|Cumulative effect of change in accounting principle                                                               |  |                                       |        |      |   |        |      |  |   | (250    | ) |  |      | (37,000 | ) |  |   |        |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                                                                                 |  | $                                     | 1,196   |      | $ | (19,124 | )    |  | $ | (14,847 | ) |  | $    | (29,591 | ) |  | $ | 26,104  |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) per common share, basic and diluted:                                                                |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                                          |  | $                                     | 0.18    |      | $ | (2.96   | )    |  | $ | (2.27   | ) |  | $    | 0.20    |   |  | $ | 0.16    |  
|Cumulative effect of change in accounting principle                                                               |  |                                       |        |      |   |        |      |  |   | (0.04   | ) |  |      | (0.99   | ) |  |   |        |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                                                                                 |  | $                                     | 0.18    |      | $ | (2.96   | )    |  | $ | (2.31   | ) |  | $    | (0.79   | ) |  | $ | 0.16    |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted average number of common and common equivalent shares outstanding                                        |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                                                             |  |                                       | 6,825   |      |   | 6,451   |      |  |   | 6,417   |   |  |      | 37,202  |   |  |   | 159,078 |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted                                                                                                           |  |                                       | 6,850   |      |   | 6,451   |      |  |   | 6,417   |   |  |      | 37,202  |   |  |   | 162,559 |  
|                                                                                                                  |  |                                       |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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|                                     |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------------ |  | ----------------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                                     |  | Year Ended December 31, |        
|                                     |  | 1999                    |         | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |        
|                                     |  | (in thousands)          |        
|BALANCE SHEET DATA:                  |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Cash and cash equivalents            |  | $                       | 59      |      | $ | 901     |      |  | $ | 3,979   |   |  | $    | 1,522   |   |  | $ | 513    |  
|Working capital (deficit)            |  |                         | 15,768  |      |   | (62,259 | )    |  |   | (67,843 | ) |  |      | (1,740  | ) |  |   | (3,439 | )
|Total assets                         |  |                         | 114,982 |      |   | 95,386  |      |  |   | 84,082  |   |  |      | 40,956  |   |  |   | 41,574 |  
|Long-term debt, less current portion |  |                         | 53,996  |      |   | 429     |      |  |   | 16      |   |  |      | 47,219  |   |  |   | 17,600 |  
|Total stockholders equity (deficit) |  |                         | 37,163  |      |   | 18,039  |      |  |   | 3,192   |   |  |      | (21,910 | ) |  |   | 10,435 |  



|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,
2003, the Company provided management services to 74 dental centers with approximately 165 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, 2003, the Company and its affiliated dental practices
maintained capitated managed care contracts covering approximately 136,000 members. Capitation fees, excluding supplemental fees and co-payments by members, totaled $8.2 million, or approximately 8.7% of net patient revenues in 2003. One managed
care contract with a national insurance company accounted for $6.5 million in revenues ($2.8 million in capitation payments and $3.7 million in patient co-payments) in 2003, equal to 6.9% 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 50% 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, 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



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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.



|                                                                                                      |  |                         |   |  |       |   |  |       |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                                                                      |  | Year Ended December 31, |  
|                                                                                                      |  | 2001                    |   |  | 2002  |   |  | 2003  |  
|Net patient revenues                                                                                  |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|Expenses:                                                                                             |  |                         |   |  |       |   |  |       |  
|Dentist salaries and other professional costs                                                         |  | 27.7                    | % |  | 29.1  | % |  | 29.4  | %
|Clinical salaries                                                                                     |  | 20.4                    | % |  | 21.5  | % |  | 19.8  | %
|Dental supplies and laboratory fees                                                                   |  | 12.0                    | % |  | 11.5  | % |  | 11.0  | %
|Rental and lease expense                                                                              |  | 6.6                     | % |  | 5.9   | % |  | 6.3   | %
|Advertising and marketing                                                                             |  | 3.4                     | % |  | 2.6   | % |  | 3.1   | %
|Depreciation and amortization                                                                         |  | 6.7                     | % |  | 3.6   | % |  | 3.3   | %
|Other operating expenses                                                                              |  | 8.2                     | % |  | 7.8   | % |  | 7.7   | %
|Bad debt expense                                                                                      |  | 5.1                     | % |  | 4.7   | % |  | 4.1   | %
|General and administrative                                                                            |  | 11.5                    | % |  | 10.1  | % |  | 10.9  | %
|Restructuring costs and other charges                                                                 |  | 2.4                     | % |  | 4.2   | % |  | 0.9   | %
|Asset impairment                                                                                      |  | 3.0                     | % |  | 3.3   | % |  | 0.0   | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  
|Total expenses                                                                                        |  | 106.8                   | % |  | 104.5 | % |  | 96.4  | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  
|Operating income (loss)                                                                               |  | -6.8                    | % |  | -4.5  | % |  | 3.6   | %
|Interest expense                                                                                      |  | 8.1                     | % |  | 5.6   | % |  | 3.4   | %
|Gain on early extinguishment of debt                                                                  |  | 0.0                     | % |  | -17.2 | % |  | -23.3 | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  
|Income (loss) before benefit for income taxes and cumulative effect of change in accounting principle |  | -14.9                   | % |  | 7.2   | % |  | 23.4  | %
|Benefit for income taxes                                                                              |  | 0.0                     | % |  | -0.2  | % |  | -4.4  | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  
|Income (loss) before cumulative effect of change in accounting principle                              |  | -14.9                   | % |  | 7.3   | % |  | 27.8  | %
|Cumulative effect of change in accounting principle                                                   |  | 0.0                     | % |  | -36.7 | % |  | 0.0   | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  
|Net income (loss)                                                                                     |  | -15.2                   | % |  | -29.3 | % |  | 27.8  | %
|                                                                                                      |  |                         |   |  |       |   |  |       |  



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Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended December 31, 2002



Net Patient Revenues Net patient revenues decreased from
$100.9 million for the year ended December 31, 2002, to $93.9 million for the year ended December 31, 2003, a decrease of $7.0 million or 6.9%. During 2003, the Company closed two dental centers and sold one dental center, which accounted for $4.2
million, or 4.2%, of the decrease in net patient revenues, and a decrease in net patient revenues from existing dental centers accounted for $2.8 million, or 2.8%.



Dentist Salaries and Other Professional Costs  For the year ended December 31, 2003, dentist salaries and other
professional costs were $27.6 million, $1.7 million, or 5.9% lower than dentist salaries and other professional costs of $29.4 million for the year ended December 31, 2002. The decrease is attributable to the closing of three dental centers in 2003,
a reduction in the number of dentists, orthodontists and hygienists employed as part of a restructuring plan the Company adopted in October 2002 to reduce costs and the decrease in net patient revenues. Expressed as a percentage of net patient
revenues, dentist salaries and other professional costs were 29.4% for the year ended December 31, 2003 relatively unchanged from the year ended December 31, 2002 percentage of 29.1%.



Clinical Salaries  Clinical salaries decreased from $21.7 million for the year ended December 31, 2002 to $18.6
million for the year ended December 31, 2003, a decrease of $3.1 million, or 14.5%. The decrease is attributable to the closing of three dental centers in 2003, and a reduction in dental center staff in connection with a restructuring plan the
Company adopted in October 2002. Expressed as a percentage of net patient revenues, clinical salaries decreased from 21.5% for the year ended December 31, 2002 to 19.8% for 2003.



Dental Supplies and Laboratory Fees  Dental supplies and laboratory fees decreased, from $11.6 million for the
year ended December 31, 2002 to $10.3 million for the year ended December 31, 2003, a decrease of $1.3 million, or 10.9%. The closing of three dental centers over the past year and the decrease in net patient revenues attributed to the decrease in
dental supplies and lab fees. Expressed as a percentage of patient revenues, dental supplies and laboratory fees decreased from 11.5% for the year ended December 31, 2002 to 11.0% for the year ended December 31, 2003.



Rental and Lease Expense  Rent and lease expense decreased from
$6.0 million for the year ended December 31, 2002, to $5.9 million for 2003, a decrease of $0.1 million, or 1.5%. The decrease results primarily from the closing of three dental centers over the past year. Expressed as a percentage of net patient
revenues, rent and lease expense increased from 5.9% for the year ended December 31, 2002 and to 6.3% for the same period of 2003.



Advertising and Marketing  Advertising and marketing expenses increased from $2.6 million for the year ended December 31, 2002, to $2.9
million for the same period of 2003, an increase of $0.3 million, or 10.2%. The increase is attributable primarily to an increase in television advertising during 2003, which was partially offset by reductions in direct mail and other advertising
sources. Expressed as a percentage of net patient revenues, advertising and marketing expenses increased from 2.6% in 2002 to 3.1% for the year ended December 31, 2003.



Depreciation and Amortization  Depreciation and amortization decreased from $3.6 million for the year ended
December 30, 2002 to $3.1 million for 2003, a decrease of $0.5 million, or 14.6%. The closing of three dental centers over the past year together with a decline in depreciation expense as property and equipment became fully depreciated have resulted
in the decrease in depreciation and amortization expense. Expressed as a percentage of net patient revenues, depreciation and amortization decreased from 3.6% in 2002 to 3.3% for the year ended December 31, 2003.



Other Operating Expenses  Other operating expenses decreased
from $7.9 million for the year ended December 31, 2002, to $7.2 million for the year ended December 31, 2003, a decrease of $0.7 million or 8.7%. Other operating expenses represent expenses related to the operation of the Companys dental
centers, such as utilities, maintenance and communication costs. The decrease is attributable primarily to the closing of three dental centers in 2003 and a cost reduction plan implemented as part of the Companys restructuring plan adopted in
October 2002. Expressed as a percentage of net patient revenues, other operating expenses decreased slightly from 7.8% for the year ended December 31, 2002 to 7.7% for 2003.



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Bad Debt Expense  Bad debt expense of $3.9 million for the year ended December 31, 2003
decreased by $0.9 million, or 18.7% from $4.8 million in 2002. The decrease in bad debt expense results from improved collections of patient receivables, particularly in the last half of the year. Expressed as a percentage of net patient revenues,
bad debt expense decreased from 4.7% for the year ended December 31, 2002 to 4.1% for 2003.



General & Administrative Expense  General and administrative expenses of $10.3 million for the year ended December 31, 2003, increased by 0.3% from general and administrative expenses of $10.2 million
in 2002. The increase in general and administrative expenses is attributable primarily to $0.2 million of severance for Mr. Usdan that was expensed in 2003, an increase in consulting fees resulting from fees paid to Sentinel pursuant to a management
agreement entered into in May 2003 and increased legal fees. The increase was offset by reductions in corporate and regional staff and other overhead expenses related to a restructuring plan adopted by the Company in October 2002. On June 13, 2003,
James M. Usdan, President, Chief Executive Officer, and a member of the board of directors, resigned from all of his positions as an officer and director of the Company. Expressed as a percentage of net patient revenues, general and administrative
expense increased from 10.1% for the year ended December 31, 2002, to 10.7% for 2003.



Restructuring Costsand Other Charges From June 2000 until July 2002, the Company was in default under the Old Credit Agreement with its Senior Secured Lenders (2002 Restructuring);
(2) Senior Subordinated Notes of $15.0 million issued to the Senior Subordinated Lenders; and (3) and $3.2 million in Seller Notes. On July 19, 2002, the Company entered into the 2002 Restructuring with its Senior Secured Lenders, its Senior
Subordinated Lenders and the holders of the Seller Notes regarding the debt outstanding under the Old Credit Agreement, the Senior Subordinated Notes and the Seller Notes. On May 15, 2003, the Company entered into the 2003 Restructuring. For the
year ended December 31, 2003 the Company recorded restructuring costs and other charges of $0.8 million representing legal and professional fees related to the 2003 Restructuring. For the year ended December 31, 2002, the Company recorded
restructuring costs and other charges of $4.3 million including remaining lease obligations on closed offices and legal and professional fees related to the 2002 Restructuring of the Old Credit Agreement.



Gain on Early Extinguishment of Debt In connection with the
2002 Restructuring the Company recognized a gain of $17.3 million on the early extinguishment of debt in 2002. In 2003, the Company recorded a $21.9 million gain on extinguishment of debt related to the 2003 Restructuring.



Interest Expense  Interest expense decreased from $5.6 million
for the year ended December 31, 2002, to $3.2 million for the year ended December 31, 2003, a decrease of $2.4 million or 43.0%. In May 2003 and July 2002, the Company entered into various agreements with its lenders to restructure its outstanding
debt. Pursuant to these restructurings, a total of approximately $35.3 million in outstanding debt was forgiven and $16.4 million in debt was paid. In addition, the Companys interest rate on its remaining debt was reduced. The reduction in
outstanding debt and lower interest rates accounted for the decrease in interest expense.



Income taxes  The Companys effective tax rate for the year ended December 31, 2003 was a benefit of 18%. This rate differs from the federal statutory tax rate of 34% primarily as a result of
provisions of the federal income tax code which provide for the exclusion from taxation of the $21.8 million gain recognized upon forgiveness of indebtedness as the Company met insolvency conditions established by the tax code at the time of the
forgiveness and the release of approximately $4.5 million in valuation allowance recorded against the deferred tax asset. The tax code additionally requires that the Company reduce tax attributes to the extent that it has forgiveness of indebtedness
that met the insolvency conditions. Accordingly, the Company reduced its net operating loss carryforwards. The Companys management expects that the effective tax rate for periods subsequent to 2003 will be between 30% and 40%, reflecting
federal and state income tax rates.



Cumulative Effect of
Change in Accounting Principle  Effective January 1, 2002, the Company adopted FASB Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In connection with the Companys adoption of SFAS 142, the
Company recorded a $37.0 million transitional goodwill impairment charge at the beginning of the fiscal year.



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Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December 31, 2001



Net Patient Revenue  Net patient revenues increased from $97.9
million for the year ended December 31, 2001 to $100.9 million for the year ended December 31, 2002, an increase of $2.9 million or 3.0%. Patient revenues for dental centers open for more than one year increased approximately $8.2 million, or 8.3%,
from 2001, partially offset by a decrease in revenues of approximately $5.1 million, or 5.3%, from the closure of 23 dental centers since January 2001. Higher net patient revenues resulted from fee increases in 2002 and better average revenue per
patient.



Dentist Salaries and Other Professional Costs
 For the year ended December 31, 2002, dentist salaries and other professional costs were $29.4 million, $2.3 million, or 8.4% higher than dentist salaries and other professional costs of $27.1 million for the year ended December 31, 2001.
Higher dentist compensation and increased hiring of hygienists accounted for the increase. Expressed as a percentage of net patient revenues, dentist salaries and other professional costs increased from 27.7% to 29.1% for the years ended December
31, 2001 and 2002, respectively.



Clinical Salaries
 Clinical salaries increased from $20.0 million for the year ended December 31, 2001 to $21.7 million for the year ended December 31, 2002, an increase of $1.7 million or 8.7%. The increase is attributable to higher compensation associated
with the upgrading of dental office management and other personnel. Expressed as a percentage of net patient revenues, clinical salaries increased from 20.4% for the year ended December 31, 2001 to 21.5% for the same period of 2002.



Dental Supplies and Laboratory Fees  Dental supplies and
laboratory fees decreased slightly from $11.8 million for the year ended December 31, 2001 to $11.6 million for the year ended December 31, 2002, an increase of $0.2 million or 1.3%. The decrease is attributable primarily to improved cost controls
associated with the purchasing of dental supplies. Expressed as a percentage of net patient revenues, dental supplies and laboratory fees decreased from 12.0% for the year ended December 31, 2001, to 11.5% for the comparable period of 2002.



Rental and Lease Expense  Rental and lease
expense of $6.0 million for the year ended December 31, 2002 decreased by $0.5 million, or 7.2% from the year ended December 31, 2001. The decrease is attributable to the closing of 23 dental centers since January 2001. Expressed as a percentage of
net patient revenues, rent and lease expense decreased from 6.6% for the year ended December 31, 2001 to 5.9% for the year ended December 31, 2002.



Advertising and Marketing  Advertising and marketing expenses decreased from $3.3 million for the year ended December 31, 2001 to $2.6
million for the year ended December 31, 2002, a decrease of $0.7 million, or 20.0%. Lower expenditures on television advertising accounted for the decrease. Expressed as a percentage of net patient revenues, advertising and marketing expenses
decreased from 3.4% in the prior year to 2.6% for the year ended December 31, 2002.



Depreciation and Amortization  Depreciation and amortization decreased from $6.6 million for the year ended December 31, 2001 to $3.6 million for the year ended December 31, 2002, a decrease of $3.0
million or 45.2%. Effective January 1, 2002, the Company adopted SFAS 142, Goodwill and Other Intangible Assets and reclassified approximately $54.9 million from management services agreements to goodwill, and as required by SFAS 142, the Company no
longer records amortization expenses related to this goodwill. The effect of this change increased income before cumulative effect of change in accounting principle by approximately $2.7 million, or $0.07 per share, for the year ended September 30,
2002. Had the Company adopted SFAS 142 effective January 1, 2001, the effect would have been to reduce the loss before cumulative effective of change in accounting principle by approximately $2.7 million, or $0.43 per share for the year ended
December 31, 2001. In the second quarter of 2002, the Company completed its quantification of the impairment charge and recorded a $37.0 million impairment charge, related to the write-down of goodwill, as a cumulative effect of change in accounting
principle effective January 1, 2002. The remainder of the decrease resulted from the closing of 23 centers since January 1, 2001. Expressed as a percentage of net patient revenues, depreciation and amortization decreased from 6.7% in the prior year
to 3.6% for the year ended December 31, 2002.



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Other Operating Expenses  Other operating expenses decreased from $8.0 million for the year
ended December 31, 2001, to $7.9 million for the year ended December 31, 2002, a decrease of $0.1 million or 1.6%. The decrease is attributable primarily to lower communication costs. Expressed as a percentage of net patient revenues, other
operating expenses decreased from 8.2% for the year ended December 31, 2001 to 7.8% for the year ended December 31, 2002 period.



Bad Debt Expense  Bad debt expense decreased from $4.9 million for the year December 31, 2001 to $4.7 million for the year ended December 31,
2002, a decrease of $0.2 million, or 4.0%. Expressed as a percentage of net patient revenues, bad debt expense decreased from 5.1% for the year ended December 31, 2001 to 4.7% for the year ended December 31, 2002. The decrease is attributable to a
slight improvement in the collections of accounts receivable.



General & Administrative Expense  General and administrative expenses decreased from $11.3 million for the year ended December 31, 2001 to $10.2 million for the year ended December 31, 2002, a decrease of $1.1 million, or
9.5%. Expressed as a percentage of net patient revenues, general and administrative expense decreased from 11.5% to 10.1% for the year ended December 31, 2001 and 2002, respectively. The decrease is attributable primarily to a reduction of regional
personnel costs, and lower professional and recruiting fees.



Restructuring Costs and Other Charges  For the nine months ended December 31, 2002, the Company recorded restructuring costs and other charges of $4.3 million attributable primarily to legal and professional fees related to the
restructuring of the Companys senior credit facility, remaining lease obligations on closed dental centers and severance cost associated with a restructuring of the Companys corporate and regional management and administrative personnel
adopted in September 2002. Additionally, $0.3 million in employee bonuses associated with the restructuring of the Credit Agreement have been included, fifty percent of which was paid in July 2002 and the balance was paid in the first quarter of
2003. 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.



Interest Expense  Interest expense decreased from $8.0 million for the year ended December 31, 2001 to $5.6 million for the year ended
December 31, 2002, a decrease of $2.3 million or 29.3%. The decrease resulted from a decrease in the variable interest rate under the bank credit facility and senior subordinated note agreements and the restructuring of the Companys debt,
which resulted in lower debt levels in the last half of 2002.



Gain on early extinguishment of debt  In connection with the Restructuring of the Companys Senior Subordinated Notes and Old Notes, the Company recognized a gain of approximately $17.3 million on extinguishment of the
debt in the third quarter of 2002. (See Note 2 of Notes to Consolidated Financial Statements).



Cumulative Effect of Change in Accounting Principle  In connection with the Companys adoption of SFAS 142, the Company recorded a $37.0 million transitional goodwill impairment charge effective
January 1, 2002. (See Note 2 of Notes to Condensed Consolidated Financial Statements). 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, resulting in a cumulative
effect adjustment of $0.3 million during 2001



Asset
Impairment  For the year ended December 31, 2002 the Company recorded a $0.4 million asset impairment, resulting primarily from the closing of three centers in Texas and one center in Florida and the sale of two centers in Texas, two
centers in Florida and two centers in California. 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



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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.



Liquidity and Capital Resources



In July 2002, the Company completed a restructuring of certain indebtedness, which included extinguishing certain subordinated debt due by the Company and extending payments due under the Companys Old Credit Agreement. In October
2002, the Company undertook additional restructuring activities to improve operating results. Components of this plan included: (i) phasing-out doctor compensation guarantees and restructuring staff bonus incentive programs; (ii) continuing to
monitor and close unprofitable and under-performing dental centers; (iii) continuing to upgrade dental office management personnel; (iv) reducing general and administrative expenses, including the reduction of corporate and regional management and
administrative staff; (v) decentralizing and or outsourcing certain processes including the call center, marketing, billing, and collections; and (vi) reducing marketing expenses.



In May 2003, the Company completed the 2003 Restructuring. Management believes this is an important step in its operational
plan as it provides financial flexibility and the ability to invest in upgrading of equipment and facilities. For 2003, management focused on: (i) aggressive cost control and full implementation of the cost reduction program initiated in October
2002; (ii) refurbishing and modernizing existing dental centers; (iii) upgrading dental office management personnel; and (iv) training of dental office staff personnel to improve patient services, office efficiency and effectiveness, and
implementing improvements to the practice management system.



On May 15, 2003, the Company entered into a series of agreements to restructure certain of its outstanding debt and equity. Prior to May 15, 2003, the Company maintained the Old Credit Agreement with a bank group that included, among other
banks, BofA and GECC. As of May 14, 2003, the Company had $46.7 million outstanding under the Old Credit Agreement, of which $38.3 million was due the lenders excluding GECC. In addition, the Company maintained the Senior Notes due Heller, Midwest
and James M. Usdan, its Chief Executive Officer at that time. The 2003 Restructuring transaction consisted of the following:



| |  | The lenders under the Old Credit Agreement, excluding GECC, accepted a payment of approximately $16.4 million in full satisfaction of $38.3 million in principal and $2.0 million in
fees that the Company owed the Senior Secured Lenders. The Company recorded a gain on extinguishment of debt of approximately $21.8 million in the second quarter of 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Credit Agreement with GECC, as agent, which includes a $12.5 million term loan and a $3.5 million revolving line of credit. The term loan includes $8.4
million that was owed to GECC under the Old Credit Agreement, which was rolled into the Credit Agreement.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Purchase Agreement with Sentinel, GECC (as successor to Heller), Midwest and others. Pursuant to this agreement, the Company issued $7.0 million in
Subordinated Notes and issued 79,190 shares of Series B Preferred Stock. Under the terms of the Purchase Agreement, the issuance and funding of the Series B Stock and Subordinated Notes took place in two closings. In the initial closing on May 15,
2003, the Company issued $6.7 million in Subordinated Notes for an equal amount of cash and issued 76,310 shares of Series B Preferred Stock for $5.7 million in cash plus the surrender of $1.9 million in principal and accrued interest due under the
Senior Notes and warrants to purchase approximately 17,974,062 shares of Common Stock. The Senior Notes were recorded net of a discount of $0.3 million, the remaining value assigned to the warrants. In the subsequent closing during the third quarter
of 2003, the Company issued, to key members of management and certain other individuals, the remaining 2,880 shares of Series B Preferred Stock for approximately $0.3 million in cash and the remaining $0.3 million in Subordinated Notes for an equal
amount of cash. The Series B Stock is convertible into an aggregate 165,022,853 shares of Common Stock.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Pursuant to a Warrant Purchase Agreement, the Company acquired from the lenders under the Old Credit Agreement other than GECC, 49,875 warrants to purchase shares of Series A-2
Stock, for an aggregate purchase price of approximately $0.6 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2003, the Company had a net working capital deficit of $3.4 million. Current assets totaled $10.1 million, consisting of cash and cash equivalents of $0.5 million, billed and unbilled accounts
receivable of $8.5 million and prepaid expenses and other current assets of $1.0 million. Current liabilities totaled $13.5 million, consisting of $2.3 million in accounts payable, $8.3 million in accrued liabilities, $1.1 million in deferred income
taxes and $1.9 million in current maturities of long-term debt and revolving line of credit.



For the year ended December 31, 2003, cash provided by operating activities was $4.3 million. In the year ended December 31, 2002, cash used in operating activities amounted to $2.3 million. The improvement resulted
primarily from an increase in net earnings, which increased from a net loss of approximately $9.9 million for the year ended December 31, 2002, excluding a $17.3 million gain on extinguishment of debt and a $37.0 million cumulative effect of change
in accounting principle, to net income of approximately $0.1 million for the year ended December 31, 2003, excluding a $21.9 million gain on extinguishment of debt and a $4.2 million income tax benefit.



For the year ended December 31, 2003, cash used in investing activities was
$1.0 million, consisting of capital expenditures. For the year ended December 31, 2002, cash used in investing activities was $0.6 million, consisting of $0.9 million in capital expenditures, offset by $0.3 million in proceeds from sale of property
and equipment.



For the year ended December 31, 2003, cash used
in financing activities totaled $4.3 million, representing $19.8 million in repayments of long-term debt and capital lease obligations, $0.6 million to repurchase outstanding warrants to purchase Series A Stock, $0.1 million to purchase Company
common stock and $2.3 million in debt and equity issuance costs, offset by $12.4 million in proceeds from the issuance of long-term debt and $6.0 million in proceeds from the issuance of Series B Stock. For the year ended December 31, 2002, cash
provided by financing activities totaled $0.4 million, resulting from $1.7 million in proceeds from issuance of long-term debt, offset by $0.6 million in repayments of long-term debt and capital lease obligations and $0.7 million in debt and equity
issuance costs. The Company has budgeted $3.0 million in capital expenditures for 2004, which it expects to fund through internally generated funds and borrowings under the Credit Agreement.



The Company anticipates that cash flow from operations, the existing cash
balance as of December 31, 2003, and additional borrowing capacity of $3.5 million under its revolving line of credit will provide adequate cash flows and liquidity for 2004 for the Company to operate normally and to be able to satisfy the capital
expenditures, scheduled debt payments and operational budgets of the Company for the upcoming year. There was approximately $0.4 million outstanding under the revolving line of credit at December 31, 2003.



The following table summarizes, as of December 31, 2003, the Companys
contractual commitments related to debt, leases and other arrangements during the next five years (in thousands):



|                 |  |                         |       |      |   |       |  |      |       |      |   |            |  |   |        |  |   |      
|---------------- |  | ----------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | ------ |  | - | -----
|                 |  | Year ended December 31,
|                 |  | 2004                    |       | 2005 |   | 2006  |  | 2007 |       | 2008 |   | Thereafter
|Long-term debt   |  | $                       | 1,510 |      | $ | 2,502 |  | $    | 3,002 |      | $ | 2,252      |  | $ | 9,844  |  | $ |     
|Operating leases |  |                         | 4,195 |      |   | 3,524 |  |      | 2,888 |      |   | 1,871      |  |   | 1,163  |  |   | 1,048
|                 |  |                         |       |      |   |       |  |      |       |      |   |            |  |   |        |  |   |      
|Total            |  | $                       | 5,705 |      | $ | 6,026 |  | $    | 5,890 |      | $ | 4,123      |  | $ | 11,007 |  | $ | 1,048
|                 |  |                         |       |      |   |       |  |      |       |      |   |            |  |   |        |  |   |      



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 of America. The preparation of these financial statements requires



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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 (Note 2 of Notes to Consolidated Financial Statements), the accounting policies described below may involve a higher degree of judgment and complexity.



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 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, 2003, 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 of 30.0% of net patient revenues; plus 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.



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 performed and recognized 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



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receives a predetermined amount per patient per month in exchange for providing certain 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.



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 involved the purchase of tangible and
intangible assets and the assumption of certain liabilities of the affiliated dental practices. As part of the purchase allocation, the Company allocated the purchase price to the tangible assets acquired and liabilities assumed, based on estimated
fair market values. In connection with each acquisition, the Company enters into a long-term management services agreement with each affiliated dental practice, which cannot be terminated by either party without cause. Prior to January 1, 2002, the
cost of the management services agreements were amortized on a straight line basis over their term, or such shorter period as may have been indicated by the facts and circumstances. Amortization periods of the management services agreements acquired
through December 31, 2001 were 25 years. Effective January 1, 2002, the Company adopted SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets, and reclassified approximately $54.9 million from management services agreements to
goodwill. Under SFAS 142, substantially all of the Companys goodwill is no longer amortized, and the Company must perform an annual impairment test for goodwill and intangible assets. The Company allocates goodwill to its four reporting units,
which are Texas, Florida, California and Tennessee. SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the
reporting unit is less than its carrying value, an impairment loss would be recorded to the extent of that difference. The Company based the fair values of its reporting units on discounted cash flow methodology and other company comparisons. Under
SFAS 142, the Company recorded a transitional goodwill impairment charge of $37.0 million, presented as a cumulative effect of accounting change at the beginning of 2002. This transitional goodwill impairment charge was attributable to market
declines in its reporting units in Texas, Florida, California and Tennessee. The Company recorded a $3.0 million impairment charge for the year ended December 31, 2002, as a result of lower than projected earnings in the California and Florida
units. For the year ended December 31, 2003, the Company did not incur an impairment on any of its reporting units



The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amount of tax-related assets and liabilities and income tax provisions. The Company evaluates the recoverability of its deferred tax assets on an ongoing basis. In making this evaluation the Company considers all
available positive and negative evidence, to determine whether, based on such evidence, it is more likely than not that some portion or all of the net deferred tax assets will be realized in future periods. This evaluation requires significant
judgment. In addition, the Company has made significant estimates involving current and deferred income taxes, tax attributes relating to the interpretation of various tax laws, historical bases of tax attributes associated with certain tangible and
intangible assets and limitations surrounding the future realization of the deferred tax assets.



Based on the Companys operating results in prior years, the Company had established a valuation allowance against its net deferred tax asset as it
was deemed more likely than not that the net deferred tax assets would not be realized. During the fourth quarter of 2003, the Company determined, based on the 2003 Restructuring, operating results for the period subsequent to the 2003 Restructuring
and anticipated operating



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income and cash flows for future periods that it is more likely than not the certain deferred tax assets will be realized in the future and accordingly, it
was appropriate to release the valuation allowance recorded against the net deferred tax asset.



The Company believes that it is more likely than not that the net deferred tax asset of $4.6 million will be recovered through reductions in tax
liabilities in future periods. However, recovery is dependent on achieving its forecast of future operating income over a period of time. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis.
Failure to achieve its operating income targets may change the assessment regarding the recoverability of the net deferred tax assets and such change could result in an allowance being recorded against some or all of the net deferred tax assets. Any
increase in a valuation allowance would result in additional income tax expense, lower stockholders equity and could have a significant impact on net in future periods.



The Company accounts for its stock-based compensation plans in accordance with APB 25, Accounting for Stock Issued to
Employees (APB 25). In accordance with the provisions of APB 25, stock-based employee compensation cost is not reflected in net income for options granted at an exercise price equal to or in excess of the market value of the
underlying Common Stock on the date of grant. The Company recognizes compensation cost on options granted at an exercise price less than the market value of the underlying Common Stock on the date of grant. In August 2003, the Company issued
approximately 3.9 million stock options with an exercise price of $0.05 per share while the market value of the underlying Common Stock on the date of grant was $0.15 per share. The Company recorded approximately $0.4 million in deferred
compensation, which is expensed over the vesting period of five years. The Company expensed approximately $32,000 in compensation expense during 2003. All stock options granted by the Company prior to August 2003 were issued with an exercise price
equal to the market value of the underlying Common Stock on the date of grant.



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.



Inflation



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



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which addresses the consolidation of variable interest entities
(VIEs) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity
investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. In December 2003, the FASB issued a revision to FIN 46,
Interpretation No. 46R (FIN 46R), to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that
are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. The Company does not have interests
in structures that are commonly referred to as special-purpose entities and therefore has not adopted FIN 46R as of December 31, 2003. The Company does not expect its adoption of FIN 46R, to materially affect its financial position, results of
operations or cash flows.



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In April 2003, the FASB issued Statement No. 149, Amendment of FASB Statement No. 133 on Derivative
Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FASB Statement No.
133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and should be applied prospectively. The provisions of SFAS 149, relating to FASB Statement No. 133
implementation issues that have been effective for fiscal quarters beginning prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The impact of adoption of SFAS 149 did not have a material effect
on the Companys financial position, results of operations or cash flows.



In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for
the issuer are required to be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 had no material impact on the Companys financial position, results of operations or cash flows as of and for the year ended December 31, 2003.



In its October 29, 2003 meeting, the FASB proposed to make the expensing of stock options mandatory beginning in 2005. The
guidance regarding this change is expected to be released in 2004. Additionally, the FASB proposed to specify the approach that companies can use in making the transition to the expensing of options, allowing companies to include previously granted
unvested options in their calculations as well as the ones granted in the current year. When the rules are finalized, the Company will evaluate the impact on its financial position, results of operations and cash flows.



In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104 clarifies existing guidance regarding revenues for contracts that contain multiple deliverables to make it consistent with Emerging Issues Task Force No. 00-21
(EITF 00-21). The adoption of SAB 104 and EITF 00-21 did not have a material impact on the Companys financial position, results of operations or cash flows.



|Item 7A. | Quantitative And Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



The Companys financial instruments with market risk exposure are borrowings under its Credit Agreements that total $12.1 million at December 31,
2003. Based on this balance, a change of one percent in the interest rate would cause a change in interest expense of approximately $121,000, or $0.0 per share, on an annual basis. The Credit Agreement 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 LIBOR interest rate.



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



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



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



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



The Companys management, including the Companys principal executive officer and principal financial officer, has evaluated the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the
Companys principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K. However, some of the
information used for internal and external reporting by the Company and management is derived from



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data input by decentralized employees at the dental centers. The decentralization of input and system controls may affect the accuracy of this data.
Management is aware of this risk and is taking steps to reduce this risk by improving the Companys dental practice management system. However, such improvement may require a new practice management system, which management is presently
evaluating but may take several years to implement and could present additional risk associated with systems conversions.



There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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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.



|                    |  |     |  |                                                |  |               
|------------------- |  | --- |  | ---------------------------------------------- |  | --------------
|Name                |  | Age |  | Position with the Company                      |  | Director Since
|                    |  |     | 
|Frank A. Baynham(2) |  | 50  |  | Director                                       |  | 2002          
|                    |  |     | 
|Ira Glazer(1)       |  | 52  |  | Director                                       |  | 2002          
|                    |  |     | 
|Edward L. Kuntz(2)  |  | 59  |  | Director                                       |  | 2002          
|                    |  |     | 
|David S. Lobel(2)   |  | 50  |  | Director, Chairman of the Board of Directors   |  | 2003          
|                    |  |     | 
|Paul F. Murphy(1)   |  | 38  |  | Director                                       |  | 2003          
|                    |  |     | 
|John M. Slack       |  | 56  |  | Interim Chief Executive Officer                |  |               
|                    |  |     | 
|Joseph P. Keane     |  | 40  |  | Senior Vice President, Chief Financial Officer |  |               
|                    |  |     | 
|Tim S. Tiffin       |  | 40  |  | Vice President, Chief Information Officer      |  |               

---

|(1) | Member of the Audit Committee.
|--- | ------------------------------



|(2) | Member of the Compensation Committee.
|--- | -------------------------------------



Board of Directors



Frank A. Baynham became a director of the Company in October 2002. Mr. Baynham has been in senior management for Luxottica Retail since April 1987 and is
currently Executive Vice President, Stores. Luxottica is a multinational distributor of designer eyewear and owns LensCrafters and Sunglass Hut. From 1981 to 1987, Mr. Baynham held management positions with Proctor & Gamble. Mr. Baynham has been
designated as a director of the Company pursuant to the Stockholders Agreement. Mr. Baynham received a B.A. from Murray State University.



Ira Glazer became a director of the Company in August 2002. Mr. Glazer is the Chief Executive Officer of the Wire Rope Corporation of America, Inc., a
privately owned manufacturer of wire, wire rope and related products. Mr. Glazer was appointed as the Chief Restructuring Officer of Wire Rope when it filed for bankruptcy protection under Chapter 11 in May 2002. From 1999 until 2003, Mr. Glazer was
a managing director of Getzler & Co., Inc., a New York based turnaround specialist. In his capacity as an employee of Getzler & Co., he served as acting Chief Executive Officer of the Company from February 2001 until June 2001. As a private
consultant prior to 1999, he served as President of Knitwaves, Inc., a privately owned manufacturer of childrens knitwear, from May 1998 until February 1999. Knitwaves filed bankruptcy in November 1998. From 1986 until September 1997, Mr.
Glazer served as Chief Financial Officer and Chief Operating Officer of Maidenform Worldwide, Inc., a private manufacturer of intimate apparel. Maidenform filed bankruptcy in August 1998. Before joining Maidenform, Mr. Glazer spent ten years with
Chase Manhattan Bank, where he was a Vice President and Division Executive in middle market



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lending. Mr. Glazer has been designated as a director of the Company pursuant to the Stockholders Agreement. Mr. Glazer received a B.B.A. from Pace
University.



Edward L. Kuntz became a director of the Company
in August 2002. Mr. Kuntz has served as the Chairman of the Board and Chief Executive Officer of Kindred Healthcare, Inc., a publicly held provider of long-term healthcare services, since January 1999. Mr. Kuntz served as the Chief Operating Officer
and a director of Kindred Healthcare from November 1998 to January 1999. He also served as President of Kindred Healthcare from November 1998 until January 2002. Mr. Kuntz was Chairman and Chief Executive Officer of Living Centers of America, Inc.,
a publicly held provider of long-term healthcare, from 1992 to 1997. After leaving Living Centers of America, Inc., he served as an advisor and consultant to a number of healthcare services and investment companies and was affiliated with Austin
Ventures, a venture capital firm. In addition, Mr. Kuntz served as Associate General Counsel from 1978 until 1985, and as Executive Vice President from 1985 until the formation of Living Centers of America, Inc. in 1992, of ARA Living Centers. Mr.
Kuntz has been designated as a director of the Company by Sentinel pursuant to the Stockholders Agreement. Mr. Kuntz received a J.D. and a B.A. from Temple University.



David S. Lobel was elected Chairman of the Board of Directors in July 2003. Mr. Lobel has been Managing Partner of Sentinel,
a private equity investment firm he founded in 1995. From 1981 through 1995, Mr. Lobel was associated with First Century Partners (First Century), a venture capital affiliate of Smith Barney, where he served as a general partner of funds
managed by First Century from 1983 to 1995. Before joining First Century, Mr. Lobel was a consultant at Bain & Company, a management consulting firm, from 1979 to 1981. He currently is Chairman of Alemite Corporation, an industrial lubrication
equipment producer, Cottman Transmission Holdings, LLC, an automotive transmission repair company, Floral Plant Growers, LLC, a grower of floriculture products and Romacorp, Inc., an owner and franchisor of Tony Romas restaurants, and is a
Director of Buffets, Inc., an operator of buffet-style restaurants, Growing Family, Inc., an in-hospital infant photography services company and Spinrite Limited Partnership, a leading manufacturer of yarn for the craft industry. He received an
M.B.A. and an M.S. from Stanford University. Mr. Lobel has been designated as a director of the Company by Sentinel pursuant to the Stockholders Agreement.



Paul F. Murphy has been a Principal at Sentinel since July 2000. Prior to that, Mr. Murphy was a Director at Dilmun Investments, Inc., the U.S. private
equity affiliate of Bahrain International Bank E.C., from 1997 to 2000. Prior to working at Dilmun, Mr. Murphy was a Vice President in the Financial Buyers Group at NationsBanc Capital Markets, Inc. from 1996 to 1997. Prior to joining NationsBanc,
Mr. Murphy was an Associate in the Merchant Banking Group of Chase Manhattan Bank from 1994 to 1996. Mr. Murphy holds an M.B.A. from Georgetown University and a B.S. from the United States Military Academy at West Point. He served on active duty for
five years as an Artillery officer in the United States Army where he attained the rank of Captain. Mr. Murphy has been designated as a director of the Company by Sentinel pursuant to the Stockholders Agreement.



Executive Officers



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



John M. Slack was appointed Interim Chief Executive Officer in June 2003. Mr. Slack joined the Company in December 1995 as Vice President and Chief Financial Officer and was appointed Senior Vice President and Chief
Administrative Officer in January 2002. 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.



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 vertical internet directory owned 50/50 by a subsidiary of Fox Entertainment Group and private investors. From



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1997 to 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.



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.



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 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 2003, the Company believes that all of the Companys executive officers and directors complied with Section 16(a) reporting requirements during
2003, except as follows: Mr. Glazer filed one report late; Mr. Baynham filed one report late; Mr. Kuntz filed one report late; Mr. Slack filed one report late; Mr. Keane filed one report late and Mr. Tiffin filed two reports late.



Information Concerning the Operation of the Board of Directors



The Companys business is managed under the direction of the Board of
Directors. The Board of Directors meets on a quarterly basis to review significant developments affecting the Company and to act on matters requiring Board approval. The Board of Directors may also hold special meetings when an important matter
requires Board action between regularly scheduled meetings. During 2003, the Board of Directors met formally 4 times. All directors attended at least 75% of the total number of meetings of the Board of Directors.



In order to facilitate the various functions of the Board of Directors, the
Board of Directors has created an Executive Committee, an Audit Committee, and a Compensation Committee. Committee members are not remunerated in addition to their annual Board retainer. The Stockholders Agreement provides that two Sentinel
Directors and one non-Sentinel Director, who shall be specified by the holders of a majority of the Sentinel Shares or the holders of a majority of the non-Sentinel Shares, respectively, shall be appointed to the Executive Committee, Compensation
Committee and Audit Committee of the Board of Directors, each of which shall have no more than three members.



Executive Committee.The Executive committee has been delegated, to the fullest extent allowed by law, the authority of the Board of Directors that
has not otherwise been delegated to another committee of the Board of Directors. The Executive Committee was formed on June 16, 2003, and consists of Mr. Lobel and Mr. Murphy. Following his hiring, the new Chief Executive Officer will also become a
member of the Executive Committee.



Audit Committee. The
Audit Committee makes recommendations to the Board of Directors concerning the engagement of independent public accountants, monitors the Companys internal accounting controls, reviews quarterly and annual financial information, and reviews
the independence, services and fees of the independent auditors. The Board of Directors adopted an Audit Committee Charter in 2000, a copy of which has been filed with the SEC. From October 14, 2002 to June 16, 2003, the Audit Committee consisted of
Ira Glazer, Paul Kreie and Edward L. Kuntz. Since June 16, 2003, the Audit Committee has consisted of Ira Glazer and Paul Murphy. The Board of Directors has determined that Ira Glazer is qualified to be the Audit Committee Financial Expert. Based on
the definition of independence in Sections 303.01(b)(2)(a) and (3) of



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the New York Stock Exchanges listing standards, all of the Companys current Audit Committee members are independent. The Audit Committee held 4
meetings during 2003, and all members of the Audit Committee attended the meetings.



Compensation Committee. The Compensation Committee periodically determines the amount and form of compensation and benefits payable to all principal officers and certain other management personnel. This
committee also administers the 2002 Plan. From October 14, 2002 to June 16, 2003, the Compensation Committee consisted of Frank A. Baynham, Paul Kreie, and Edward L. Kuntz. Since June 16, 2003, the Compensation Committee has consisted of Mr.
Baynham, Mr. Kuntz and Mr. Lobel. The Compensation Committee held 2 meetings during 2003, and all members of the Compensation Committee attended all meetings.



Code of Ethics



The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, and principal accounting officer or
controller. This Code of Ethics is attached to this Annual Report on Form 10-K as Exhibit A.



|Item 11. | Executive Compensation
|-------- | ----------------------



Directors Compensation



During 2003, each non-employee director, excluding the Sentinel directors, were paid an annual retainer of $7,500, a fee of $1,500 for each Board of
Directors meeting attended in person and $500 for each telephonic Board of Directors meeting in which the director participated. The Company paid aggregate fees of $41,500 to non-employee directors in connection with Board of Directors and
committee meetings in 2003. The Company does not pay director fees to directors who also are the Companys employees. No member of the Board of Directors was paid compensation during 2003 for his service as a director other than pursuant to the
standard compensation arrangement described above. On March 3, 2003, each non-employee director was granted 461,809 options under the 2002 Plan, exercisable at $.10 per share.



Summary Compensation Table



The following table provides certain summary information concerning compensation earned by each person who served as the Companys Chief Executive
Officer during 2003 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, 2003.



|                                                                  |  |              |  |        |                       |       |   |                         |  |                       |           |                         |   |                      |  |                     |  |   |                 
|----------------------------------------------------------------- |  | ------------ |  | ------ | --------------------- | ----- | - | ----------------------- |  | --------------------- | --------- | ----------------------- | - | -------------------- |  | ------------------- |  | - | ----------------
|Name andPrincipal Position                                        |  | Year         |  | Salary |                       | Bonus |   | OtherAnnualCompensation |  | RestrictedStockAwards |           | Number ofOptionsGranted |   | AllOtherCompensation
|                                                                  |  |              |  | ($)    |                       | ($)   |   | ($)                     |  | ($)                   |           |                         |   | ($)(1)              
|                                                                  |  |              |  |        |                       |       |  
|James M. Usdan(2) Chief Executive Officer & President             |  | 200320022001 |  | $      | 249,722272,077146,447 |       | $ | 63,33433,334           |  | $                     | 173,078 |                         | $ |                   |  | 2,500,000  325,000 |  | $ |   1,777       
|                                                                  |  |              |  |        |                       |       |  
|John M. Slack(3) Interim Chief Executive Officer                  |  | 200320022001 |  |        | 181,625168,654150,000 |       |   | 62,58433,334           |  |                       |        |                         |   |                   |  | 1,420,000         |  |   | 3,30011,6839,912
|                                                                  |  |              |  |        |                       |       |  
|Joseph P. Keane(4) Senior Vice President, Chief Financial Officer |  | 20032002     |  |        | 237,138214,769        |       |   | 61,58482,334            |  |                       |         |                         |   |                    |  | 950,000            |  |   | 3,300          
|                                                                  |  |              |  |        |                       |       |  
|Tim S. Tiffin Vice President, Chief Information Officer           |  | 200320022001 |  |        | 182,527145,769124,231 |       |   | 36,2505,000            |  |                       |        |                         |   |                   |  | 500,000           |  |   |              

---

|(1) | All other compensation paid to Mr. Usdan and Mr. Slack in 2002 included Company matching contributions to each executives 401(k) account. Other compensation
paid to Mr. Slack in 2001, 2002 and 2003 also included automobile allowances. Other compensation paid to Mr. Keane in 2003 represents an automobile allowance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Mr. Usdan was Chief Executive Officer from July 1, 2001 until June 13, 2003. Other Annual Compensation for 2003 represents severance payments to Mr. Usdan after his
June 2003 resignation. As a result of his resignation the options were cancelled.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Mr. Slack served as Chief Financial Officer in 2001, Chief Administrative Officer from January 15, 2002 until June 13, 2003. Mr. Slack was appointed Interim Chief
Executive Officer on June 13, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Mr. Keane was appointed Chief Financial Officer on January 15, 2002.
|--- | --------------------------------------------------------------------



Employment Agreements



John M. Slack. On July 19, 2002 the Company entered into a three-year employment agreement with John M. Slack. Following the initial three-year
term, the employment agreement is automatically renewed for successive one year terms unless terminated by the Company or Mr. Slack. This agreement was amended effective June 16, 2003, following his assumption of the duties of Interim Chief
Executive Officer.



The employment agreement provides for a
base annual salary of $15,417 per month, subject to increase at the sole discretion of the Compensation Committee. During the period that Mr. Slack serves as Interim Chief Executive Officer, he will be paid a bonus of $5,000 per month. Mr. Slack is
eligible for an annual bonus at the discretion and based on the criteria approved by the Compensation Committee. Mr. Slack is entitled to reimbursement of expenses, and to participate in all benefit, incentive, insurance, disability and other
similar plans provided by the Company. Mr. Slack is entitled to life insurance in an amount equal to the greater of (1) fifty percent of Mr. Slacks annual salary and (2) the amount to which Mr. Slack is entitled pursuant to the Companys
policy for its executive employees.



The Company may terminate
Mr. Slacks agreement for cause. Cause is defined in the employment agreement to include the failure to provide services, fraud or embezzlement, committing any act with the intent to injure the Company, conviction of a felony,
misappropriation of Company property, personal misconduct that has materially injured the Company, or willfully violating laws or regulations relating to the Companys business. If Mr. Slack is terminated without cause or terminates the
agreement for good reason, the Company must pay Mr. Slack a severance amount equal to one years salary, and must continue to provide, at the Companys cost, coverage under its group health plan for the applicable COBRA coverage period.
Good reason is defined in the agreement as assigning Mr. Slack duties materially inconsistent with his position, a 5% reduction in Mr. Slacks salary, a failure by the Company to continue to provide any material benefit, incentive, insurance,
disability or similar plan, requiring Mr. Slack to relocate or materially breaching the agreement.



Joseph P. Keane. On July 19, 2002 the Company entered into a three-year employment agreement with Joseph P. Keane. This employment agreement was
amended on August 19, 2003. Following the initial three-year term, the employment agreement is automatically renewed for successive one year terms unless terminated by Mr. Keane or the Company. The employment agreement provides for a base annual
salary of $15,417 per month, subject to increase at the sole discretion of the Compensation Committee. Mr. Keane is eligible for an annual bonus at the discretion and based on the criteria approved by the Compensation Committee. Mr. Keane is
entitled to reimbursement of expenses, and to participate in all benefit, incentive, insurance, disability and other similar plans provided by the Company.



The Company may terminate Mr. Keanes agreement for cause. Cause is defined in the employment agreement to include the failure to provide
services, fraud or embezzlement, committing any act with the intent to injure the Company, conviction of a felony, misappropriation of Company property, personal misconduct that has materially injured the Company, or willfully violating laws or
regulations relating to the



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Companys business. If Mr. Keane is terminated without cause or terminates the agreement for good reason, the Company must pay Mr. Keane a severance
amount equal to one years salary, and must continue to provide, at the Companys cost, coverage under its group health plan for the applicable COBRA coverage period; provided, however, that if Mr. Keane is terminated by the Company
without cause or he terminates his employment prior to the earlier of April 30, 2004 or the date 90 days after the Company hires a new Chief Executive Officer, the Company must pay him a severance amount equal to $260,000 plus certain other
benefits. Good reason is defined in the agreement as assigning Mr. Keane duties materially inconsistent with his position, a 5% reduction in Mr. Keanes salary, a failure by the Company to continue to provide any material benefit, incentive,
insurance, disability or similar plan, requiring Mr. Keane to relocate or materially breaching the agreement.



Tim S. Tiffin. On July 19, 2002, the Company entered into a three-year employment agreement with Tim S. Tiffin. Following the initial three-year
term, the employment agreement is automatically renewed for successive one year terms unless terminated by Mr. Tiffin or the Company. The employment agreement provides for a base annual salary of $15,417 per month, subject to increase at the sole
discretion of the Compensation Committee. Mr. Tiffin is eligible for an annual bonus at the discretion and based on the criteria approved by the Compensation Committee. Mr. Tiffin is entitled to reimbursement of expenses, and to participate in all
benefit, incentive, insurance, disability and other similar plans provided by the Company.



The Company may terminate Mr. Tiffins agreement for cause. Cause is defined in the employment agreement to include the failure to provide services, fraud or embezzlement, committing any act with the
intent to injure the Company, conviction of a felony, misappropriation of Company property, personal misconduct that has materially injured the Company, or willfully violating laws or regulations relating to the Companys business. If Mr.
Tiffin is terminated without cause or terminates the agreement for good reason, the Company must pay Mr. Tiffin a severance amount equal to one years salary, and must continue to provide, at the Companys cost, coverage under its group
health plan for the applicable COBRA coverage period. Good reason is defined in the agreement as assigning Mr. Tiffin duties materially inconsistent with his position, a 5% reduction in Mr. Tiffins salary, a failure by the Company to continue
to provide any material benefit, incentive, insurance, disability or similar plan, requiring Mr. Tiffin to relocate or materially breaching the agreement.



Stock Option Grants in 2003



The following table reflects certain information regarding stock options granted to the named executive officers during 2003.



|                  |  |                                                 |  |                                                       |    |  |                |      |                 |          |                                                                                               |   |           |  |   |          
|----------------- |  | ----------------------------------------------- |  | ----------------------------------------------------- | -- |  | -------------- | ---- | --------------- | -------- | --------------------------------------------------------------------------------------------- | - | --------- |  | - | ---------
|                  |  | Individual Grants                               |  |                                                       |    | 
|Name              |  | Number of Securities Underlying Options Granted |  | Percent of Total Options Granted to Employees in 2003 |    |  | Exercise Price |      | Expiration Date |          | Potential Relizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
|                  |  |                                                 |  |                                                       | 5% |  | 10%           
|James M. Usdan(1) |  | 2,500,000                                       |  | 25.34                                                 | %  |  | $              | 0.10 |                 | 3/4/2008 |                                                                                               | $ | 1,378,895 |  | $ | 2,343,742
|John M. Slack     |  | 920,000                                         |  | 9.33                                                  | %  |  |                | 0.10 |                 | 3/4/2008 |                                                                                               |   | 507,433   |  |   | 862,497  
|John M. Slack     |  | 500,000                                         |  | 5.07                                                  | %  |  |                | 0.05 |                 | 8/1/2008 |                                                                                               |   | 300,779   |  |   | 493,748  
|Joseph P. Keane   |  | 950,000                                         |  | 9.63                                                  | %  |  |                | 0.10 |                 | 3/4/2008 |                                                                                               |   | 523,980   |  |   | 890,622  
|Tim S. Tiffin     |  | 500,000                                         |  | 5.07                                                  | %  |  |                | 0.05 |                 | 8/1/2008 |                                                                                               |   | 300,779   |  |   | 493,748  

---

|(1) | Mr. Usdans options were cancelled in June 2003 as a result of his resignation from the Company. At December 31, 2003, Mr. Usdan did not have any options to purchase
Company common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Aggregate Option Exercises in 2003 and Year-End 2003 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, 2003. The Named Executive Officers exercised no options during the year ended December 31, 2003.



|                  |  |                             |             |                |               |                                                    |             |                                                                    |               |           |  |   |         |  |   |        
|----------------- |  | --------------------------- | ----------- | -------------- | ------------- | -------------------------------------------------- | ----------- | ------------------------------------------------------------------ | ------------- | --------- |  | - | ------- |  | - | -------
|Name              |  | Shares Acquired On Exercise |             | Value Realized |               | Number of Unexercised Options at December 31, 2003 |             | Value of UnexercisedIn-The-Money Options at December 31, 2003(1)
|                  |  |                             | Exercisable |                | Unexercisable |                                                    | Exercisable |                                                                    | Unexercisable
|James M. Usdan(2) |  | $                           |            |                | $             |                                                   |             |                                                                   |               |          |  | $ |        |  | $ |       
|John M. Slack     |  |                             |            |                |               |                                                   |             | 518,000                                                            |               | 1,052,000 |  |   | 110,400 |  |   | 340,600
|Joseph P. Keane   |  |                             |            |                |               |                                                   |             | 380,000                                                            |               | 570,000   |  |   | 114,000 |  |   | 171,000
|Tim S. Tiffin     |  |                             |            |                |               |                                                   |             |                                                                   |               | 500,000   |  |   |        |  |   | 175,000



|(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 $0.05 to $10.00 per share. There were 2,870,000 options granted to the Named Executive Officers that were in-the-money at December 31, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Usdans options were cancelled in June 2003, as a result of his resignation.
|--- | --------------------------------------------------------------------------------



Compensation Committee Interlocks and Insider Participation



In 2003, the members of the Compensation Committee were David S. Lobel, Frank A. Baynham and Edward L. Kuntz. Mr. Lobel is a
party to certain transactions with the Company. See Certain Relationships and Related Transactions.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------



Principal Stockholders



The following table sets forth information as of the record date with respect to beneficial ownership of the Companys Common Stock, Series A-1
Stock, Series A-2 Stock and Series B Stock by: (i) each director, (ii) each Named Executive Officer, (iii) all executive officers and directors of the Company 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 listed below has sole voting and investment power with respect to the shares beneficially owned. The business address of each person named below is
3701 Kirby Drive, Suite 550, Houston, Texas 77098, unless otherwise indicated. The percentage of each class of voting stock owned is based on 8,265,323 shares of Common Stock, 195,838 Shares of Series A-1 Stock, no shares of Series A-2 Stock and
79,190 shares of Series B Stock outstanding on the Record Date. On the Record Date, warrants to purchase 10,984 shares of Series A-2 Stock were outstanding. Each share of Series A-1 Stock and Series A-2 Stock is currently convertible into 182.68
shares of common stock and each share of Series B Stock is currently convertible into 2,083.89 shares of common stock.



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|                                                                                                                    |  |              |  |                     |                  |  |                          |                  |  |         |                |                  |   |  |        |  |                  |   |  |        |  |                  |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | ---------------- |  | ------------------------ | ---------------- |  | ------- | -------------- | ---------------- | - |  | ------ |  | ---------------- | - |  | ------ |  | ---------------- | -
|                                                                                                                    |  | Common Stock |  |                     | Series A-1 Stock |  |                          | Series A-2 Stock |  |         | Series B Stock |                 
|Name and Address of Beneficial
Owner                                                                                |  | Amount       |  | Percent of Class(a) |                  |  | Percent Upon Exercise(1) |                  |  | Amount  |                | Percent of Class |   |  | Amount |  | Percent of Class |   |  | Amount |  | Percent of Class |  
|Ira Glazer(2)609 North 2ndStreetSt. Josephs, MO 64502                                                               |  | 380,197      |  | 4.4                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 120    |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Edward Kuntz(3)680 South, Fourth StreetLouisville, KY 40202-2412                                                    |  | 1,061,637    |  | 11.4                | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 465    |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Frank A. Baynham(4)8386 Kugler Mill RoadCincinnati, OH 45243                                                        |  | 561,478      |  | 6.8                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 225    |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|David S. Lobel(5)(6) 777 Third Avenue, 32ndFlr New York NY
10017                                                    |  | 132,134,987  |  | 94.1                | %                |  | 62.6                     | %                |  |        |                | *                |   |  |       |  | *                |   |  | 63,408 |  | 80.1             | %
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Paul F. Murphy 777 Third Avenue, 32ndFlr New York NY 10017                                                          |  |             |  | *                   |                  |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|James M. Usdan                                                                                                      |  |             |  | *                   |                  |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Joseph P. Keane(7)                                                                                                  |  | 442,516      |  | 5.1                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 30     |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|John M. Slack(8)(6)                                                                                                 |  | 1,532,804    |  | 15.7                | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 552    |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Tim S. Tiffin(9)                                                                                                    |  | 131,258      |  | 1.6                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  | 15     |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|All directors, appointees and executive officers as a group (10 persons)(10)                                        |  | 136,244,877  |  | 94.2                | %                |  | 64.5                     | %                |  |        |                | *                |   |  |       |  | *                |   |  | 64,815 |  | 81.8             | %
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Sentinel Capital Partners II, L.P.(5)(6) 777 Third Avenue 32ndFloor New York, NY 10017                              |  | 132,134,987  |  | 94.1                | %                |  | 62.6                     | %                |  |        |                | *                |   |  |       |  | *                |   |  | 63,408 |  | 80.1             | %
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|General Electric Capital Corporation(11)(6)c/o Heller Healthcare Financial Services500 West MonroeChicago, IL 60661 |  | 35,602,366   |  | 81.1                | %                |  | 16.9                     | %                |  | 119,520 |                | 61.0             | % |  | 10,984 |  | 100              | % |  | 5,644  |  | 7.1              | %
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Midwest Mezzanine Fund II, L.P.(12)(6)208 South LaSalleTenth FloorChicago, IL 60604-1003                            |  | 22,678,609   |  | 73.3                | %                |  | 10.7                     | %                |  | 59,760  |                | 30.5             | % |  |       |  | *                |   |  | 5,644  |  | 7.1              | %
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Jack H. Castle, Jr.(13)(14)3834 Ella Lee LaneHouston, TX 77027                                                      |  | 1,328,000    |  | 16.1                | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Estate of Jack H. Castle, D.D.S.(14)(15)5100 San Felipe, No. 392EHouston, TX 77056                                  |  | 974,000      |  | 11.8                | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Loretta Castle(14)(15)5100 San Felipe, No. 392EHouston, TX 77056                                                    |  | 974,000      |  | 11.8                | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Castle Interests, Ltd(14)5100 San Felipe, No. 392EHouston, TX 77056                                                 |  | 514,000      |  | 6.2                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  
|                                                                                                                    |  |              |  |                     |                  |  |                          |                  | 
|Knight Securities, L.P.(16)525 Washington Blvd.23rdFloorJersey City, NJ 07310                                       |  | 753,560      |  | 9.1                 | %                |  | *                        |                  |  |        |                | *                |   |  |       |  | *                |   |  |       |  | *                |  



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|                                                                                                       |  |              |  |                     |   |  |                          |  |                |  |                  |   |  |        |  |                  |  |        |  |                 
|------------------------------------------------------------------------------------------------------ |  | ------------ |  | ------------------- | - |  | ------------------------ |  | -------------- |  | ---------------- | - |  | ------ |  | ---------------- |  | ------ |  | ----------------
|                                                                                                       |  | Common Stock |  | Series A-1 Stock    |   |  | Series A-2 Stock         |  | Series B Stock
|Name and Address of Beneficial
Owner                                                                   |  | Amount       |  | Percent of Class(a) |   |  | Percent Upon Exercise(1) |  | Amount         |  | Percent of Class |   |  | Amount |  | Percent of Class |  | Amount |  | Percent of Class
|John A. Goodman, D.D.S.(17)997 FM 2288San Angelo, TX 76901                                             |  | 1,750,473    |  | 17.5                | % |  | *                        |  | 9,582          |  | 4.9              | % |  |       |  | *                |  |       |  | *               
|                                                                                                       |  |              |  |                     |   |  |                          |  |               
|Dental Centers of America, Inc. Dental Administrators, Inc.(18)27906 Copper CrestSan Antonio, TX 78260 |  | 776,405      |  | 8.5                 | % |  | *                        |  | 4,250          |  | 2.2              | % |  |       |  | *                |  |       |  | *               
|                                                                                                       |  |              |  |                     |   |  |                          |  |               
|Soheil A. Soleimani, D.D.S.818 No. Doheny DriveNo. 604Los Angeles, CA 90069                            |  | 705,341      |  | 8.5                 | % |  | *                        |  |               |  | *                |   |  |       |  | *                |  |       |  | *               
|                                                                                                       |  |              |  |                     |   |  |                          |  |               
|Elliot Schlang, D.D.S.240 18th StreetSanta Monica, CA 90402                                            |  | 705,341      |  | 8.5                 | % |  | *                        |  |               |  | *                |   |  |       |  | *                |  |       |  | *               
|                                                                                                       |  |              |  |                     |   |  |                          |  |               
|Martin Schechter, D.D.S.605 North Linden DriveBeverly Hills, CA 90210                                  |  | 705,341      |  | 8.5                 | % |  | *                        |  |               |  | *                |   |  |       |  | *                |  |       |  | *               
|                                                                                                       |  |              |  |                     |   |  |                          |  |               
|Jeffrey D. Schechter, D.D.S.5517 Paradise Valley RoadHidden Hills, CA 91302                            |  | 705,341      |  | 8.5                 | % |  | *                        |  |               |  | *                |   |  |       |  | *                |  |       |  | *               

---

|a | In accordance with Rule 13d-3 promulgated by the SEC under the Exchange Act, each person listed in this table is deemed to beneficially own shares of common stock issuable to such
person upon exercise of options or warrants or upon conversion of convertible securities if such exercise or conversion may be effected within 60 days. However, shares of common stock issuable upon exercise or conversion of securities held by other
persons are not deemed to be outstanding for purposes of determining the percentage of the class of voting securities held by such person. Consequently, because the number of shares of common stock issuable upon exercise or conversion of outstanding
securities greatly exceeds the number of currently outstanding shares of common stock, a large number of the Companys security holders are shown as holding more than 5% of the shares of common stock outstanding.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|1. | Represents the percentage of common stock held upon the conversion into common stock of all
outstanding shares of Series A-1 Stock (35,776,356 shares of common stock), all outstanding shares of Series B Stock (165,022,853 shares of common stock), and conversion of all shares of Series A-2 Stock issuable upon exercise of outstanding Series
A-2 Warrants (2,006,595 shares of common stock), for an aggregate of 211,071,127 shares of common stock.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | Includes 250,066 shares of common stock issuable upon conversion of 120 shares of Series B
Stock, options to acquire 37,500 shares of common stock issued to Getzler & Co., Inc. pursuant to the 1996 Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan (the 1996 Plan) which are held for the benefit of
Mr. Glazer and are exercisable within 60 days. Also includes options to acquire 92,631 shares of common stock issued under the Castle Dental Centers, Inc. 2002 Stock Option Plan (the 2002 Plan) which are exercisable within
60 days. Excludes options to acquire 369,178 shares of common stock issued under the 2002 Plan which are not exercisable within 60 days.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | Includes 969,006 shares of common stock issuable upon conversion of 465 shares of Series B
Stock and options to acquire 92,631 shares of common stock issued under the 2002 Plan which are exercisable within 60 days. Excludes options to acquire 369,178 shares of common stock issued under the 2002 Plan which are not exercisable within 60
days.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Includes 468,874 shares of common stock issuable upon conversion of 225 shares of Series B
Stock and options to acquire 92,631 shares of common stock issued under the 2002 Plan which are exercisable within 60 days. Excludes options to acquire 369,178 shares of common stock issued under the 2002 Plan which are not exercisable within 60
days.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. | Based upon Amendment No. 1 to Schedule 13D filed by Mr. Lobel and Sentinel on June 30, 2003
(the Sentinel Schedule 13D). Mr. Lobel is the managing member of Sentinel Managing Company II, LLC (SCM) and has dispositive and voting control of SCM. SCM is the general partner of Sentinel
Partners II, L.P. (Sentinel Partners). Sentinel Partners is the general partner of Sentinel. Sentinel owns 63,408 shares of Series B Stock convertible into 132,134,987 shares of common stock within 60 days. Mr. Lobel may be
deemed to share beneficial voting and investment power with respect to the Series B Stock owned by Sentinel.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|6. | The Company, Mr. Fitzpatrick, Mr. Slack, Sentinel, GECC and Midwest are parties to the
Stockholders Agreement pursuant to which each of the stockholders party thereto has agreed to vote the capital stock owned by it in favor of certain designees to the board of directors. Consequently, each of the parties to the Stockholders Agreement
may be deemed to be a member of a group for purposes of Rule 13d-3 and share voting power, and consequentially beneficial ownership, of all such shares subject to the Stockholders Agreement. The securities subject to the Stockholders Agreement are
shares of common stock and securities that are convertible into an aggregate of 191,974,806 shares of common stock, representing 91.8% the common stock outstanding or issuable upon conversion of securities currently outstanding. Each party to the
Stockholders Agreement disclaims membership in a group or beneficial ownership in any shares held by any other party to the Stockholders Agreement.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. | Includes 62,516 shares of common stock issuable upon conversion of 30 shares of Series B
Stock and options to acquire 380,000 shares of common stock issued under the 2002 Plan which are exercisable within 60 days. Excludes options to acquire 570,000 shares of common stock issued under the 2002 Plan which are not exercisable within 60
days.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | Includes options to acquire 150,000 shares of common stock issued under the 1996 Plan and
options to acquire 218,000 shares of common stock issued under the 2002 Plan, which are exercisable within 60 days. Excludes options to acquire 1,052,000 shares of common stock issued under the 2002 Plan, that are not exercisable within 60 days.
Includes 552 shares of Series B Stock convertible into 1,150,304 shares of common stock within 60 days.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | Includes 31,258 shares of common stock issuable upon conversion of 15 shares of Series B
Stock and options to acquire 100,000 shares of common stock issued under the 2002 Plan which are exercisable within 60 days. Excludes options to acquire 400,000 shares of common stock issued under the 2002 Plan which are not exercisable within 60
days.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Includes options to acquire 1,163,365 of common stock, and 64,815 shares of Series B Stock
convertible into 135,067,012 shares of common stock, all of which are exercisable within 60 days.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. | Based on Amendment No. 1 to Schedule 13D filed with the SEC on May 15, 2003 by (i) Heller;
(ii) GECC; (iii) General Electric Capital Services, Inc. (GECS); and (iv) General Electric Company (GE and, together with GECC and GECS, the GE Parties). The GE Parties
may be deemed to beneficially own, and have shared voting and investment power with respect to the following securities: (a) 10,984 Series A-2 Warrants which are exercisable within 60 days (the Series A-2 Stock is convertible into 2,006,595 shares
of common stock within 60 days); (b) 119,520 shares of Series A-1 Stock convertible into 21,834,324 shares of common stock within 60 days; and (c) 5,644 shares of Series B Stock convertible into 11,761,447 shares of common stock within 60 days,
owned by GECC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. | Based on Amendment No. 1 to Schedule 13D filed with the SEC on May 15, 2003 by (i) Midwest;
(ii) ABN AMRO Mezzanine Management II, L.P., the general partner of Midwest (the GP/LP); (iii) ABN AMRO Mezzanine Management II, Inc., the general partner of the GP/LP (the Corporate GP); (iv)
LaSalle Bank Corporation, the owner of all the outstanding capital stock of the Corporate GP (LaSalle Bank Corp.); (v) ABN AMRO North America Holding Company, the owner of all the outstanding capital stock of LaSalle Bank
Corp. (AANA Holding); (vi) ABN AMRO Bank N.V., the owner of all the outstanding capital stock of AANA Holding (ABN AMRO Bank); and (vii) ABN AMRO Holding N.V., the owner of all the outstanding
capital stock of ABN AMRO Bank (ABN AMRO Holding and together with Midwest, GP/LP, Corporate GP, LaSalle Bank Corp, AANA Holding and ABN AMRO Bank, the Midwest Parties). The Midwest Parties may be
deemed to have beneficial ownership of, and have shared voting and investment power with respect to the following securities: 59,760 shares of Series A-1 Stock convertible into 10,917,162 shares of common stock within 60 days and 5,644 shares of
Series B Stock convertible into 11,761,447 shares of common stock within 60 days owned by Midwest.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. | Based on a Schedule 13G filed with the SEC on March 4, 1998 by Jack H. Castle, Jr., the
Estate of Jack H. Castle, D.D.S., Loretta Castle, and Castle Interests, Ltd. (the Castle 13G). Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H. Castle, Jr., of which Mr. Castle is Trustee.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|14. | Based on the Castle 13G. Includes 514,000 shares of common stock owned of record by Castle
Interest, Ltd., a Texas limited partnership of which the Estate of Jack H. Castle, D.D.S., Loretta Castle and Jack H. Castle, Jr. are the three general partners. Jack H. Castle, Jr., the Estate of Jack H. Castle, D.D.S. and Loretta Castle all have
shared voting and investment power, and Castle Interests, Ltd. has sole voting and investment power, with respect to the 514,000 shares of common stock held by Castle Interests, Ltd. 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 widow of Jack H. Castle, D.D.S. and the mother of Jack H. Castle, Jr.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15. | Based on the Castle 13G. The Estate of Jack H. Castle, D.D.S. and Loretta Castle have shared
voting and investment power with respect to these shares. Includes 103,000 shares of common stock held jointly by the Estate of Jack H. Castle, D.D.S. and Loretta Castle.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16. | Based on a Schedule 13G filed with the SEC on November 8, 2002.
|--- | ---------------------------------------------------------------



|17. | Includes 9,582 shares of Series A-1 Stock convertible into 1,750,473 shares of common stock
within 60 days.
|--- | -----------------------------------------------------------------------------------------------------------



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##### Table of Contents

|18. | Includes 2,698 and 1,552 shares of Series A-1 Stock held by Dental Centers of America, Inc.
and Dental Administrators, Inc., respectively, convertible into 776,405 shares of common stock within 60 days.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plan Information



|                                                           |  |                                                                                          |  |                                                                          |        |                                                                                                                                      |           
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ------ | ------------------------------------------------------------------------------------------------------------------------------------ | ----------
|Plan Category                                              |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |        | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected
incolumn (a)
|                                                           |  | (a)                                                                                      |  | (b)                                                                      |        | (c)                                                                                                                                 
|Equity compensation plans approved by security holders     |  | 7,708,327                                                                                |  | $                                                                        | 0.2865 |                                                                                                                                      | 7,846,791 
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                          |       |                                                                                                                                      | 22,116,497
|Total                                                      |  | 7,708,327                                                                                |  | $                                                                        | 0.2865 |                                                                                                                                      | 29,963,288
|                                                           |  |                                                                                          |  |                                                                          |        |                                                                                                                                      |           



The Company has
granted 261,400 options under the 1996 Plan and 7,440,427 options under the 2002 Plan. No further options will be granted under the 1996 Plan.



The 2002 Plan was adopted on July 17, 2002 by the Board of Directors of the Company. Pursuant to the 2002 Plan, 15,287,218 shares of Common Stock were
initially reserved for issuance. At the Companys annual stockholders meeting held on January 8, 2003, the Companys stockholders approved the adoption of the 2002 Plan. On July 9, 2003, the Companys board of directors amended to
2002 Plan to increase the number of shares issuable thereunder from 15,287,218 to 37,403,715. The Companys stockholders have not yet approved this amendment to the 2002 Plan.



At March 30, 2004, substantially all of the Companys officers, employees and directors were eligible to participate in
the 2002 Plan. The Company does not have any specific plans with respect to future awards under the 2002 Plan at this time.



Administration. The 2002 Plan is administered by a plan administrator (the 2002 Plan Administrator) which may be either (i) the
Board of Directors of the Company; (ii) any duly constituted committee of the Board of Directors; or (iii) any duly authorized officer or officers of the Company. To date, the Compensation Committee of the Board of Directors has served as the 2002
Plan Administrator. The 2002 Plan Administrator has sole authority to make regulations and guidelines for and to interpret the 2002 Plan. The 2002 Plan Administrator also has sole power to make awards under the 2002 Plan, to designate participants
in the 2002 Plan and to impose limitations upon awards under the 2002 Plan.



Eligibility. All directors, executive officers, key employees and consultants of the Company and certain of its subsidiaries who have the capability of making a substantial contribution to the success of
the Company are eligible to participate in the 2002 Plan.



Shares Subject to 2002 Plan. Currently, not more than 37,403,715 shares of Common Stock may be distributed in accordance with the terms of the 2002 Plan. In addition, the number of shares is subject to adjustment in the event
of certain dilutive changes in the number of outstanding shares. The Company issues authorized but unissued shares under the 2002 Plan. Any shares subject to an award which are not used because the terms and conditions of the award are not met may
again be used for an award under the 2002 Plan.



39



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Transferability. Rights under any award generally may not be transferred except by will or
the laws of descent and distribution provided that the Plan Administrator may, in its discretion, authorize all or a portion of the stock options (other than incentive stock options) to be granted on terms which permit transfer by the optionee to a
trust or trusts for the exclusive benefit of the optionees children, stepchildren, grandchildren, parents, stepparents, grandparents, or spouse, including adoptive relationships, provided that:



| |  | such trust or trusts must be controlled by the optionee,
| | - | --------------------------------------------------------



| |  | there may be no consideration for any such transfer,
| | - | ----------------------------------------------------



| |  | the option agreement pursuant to which stock options are granted must be approved by the Plan Administrator, and must expressly provide for transferability, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | subsequent transfers will be prohibited except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



Amendment of the 2002 Plan. The 2002 Plan may be amended by the
Board of Directors without the consent of the stockholders except that any amendment, though effective when made, will be subject to stockholder approval if required by any federal or state law or regulation or by the rules of any stock exchange or
automated quotation system on which the Common Stock may then be listed or quoted. In addition, no modification of an award can impair the rights of a holder of an outstanding award under the 2002 Plan without such holders consent.



Change in Control. In the event of certain changes in
control of the Company, the 2002 Plan Administrator may at its discretion do any or all of the following:



| |  | accelerate any time periods relating to exercise or realization of the award;
| | - | -----------------------------------------------------------------------------



| |  | cause the awards to be assumed by the successor corporation; or
| | - | ---------------------------------------------------------------



| |  | cancel all outstanding options as of the effective date of the change in control, provided that each holder has the right to exercise such option in full for at least 30 days prior
to the change in control.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock
Options. A grant of a stock option entitles a participant to purchase from the Company a specified number of shares of Common Stock at a specified price per share. At the discretion of the 2002 Plan Administrator, stock options may be
granted as non-qualified stock options or incentive stock options, but incentive stock options may only be granted to executive officers and other employees of the Company or a subsidiary. In addition, incentive stock options may not be granted to
any owner of 10% or more of the total combined voting power of the Company and its subsidiaries. Incentive stock options shall be subject to any terms and conditions as the 2002 Plan Administrator deems necessary or desirable in order to qualify as
an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code). No incentive stock options shall be awarded after the tenth anniversary of the effective date of the 2002 Plan.



The purchase price per share of Common Stock subject to an
option is 100% of the fair market value of a share of Common Stock at the time such option is granted or, in the case of non-qualified stock options, as otherwise fixed by the 2002 Plan Administrator. Upon exercise, payment for shares of Common
Stock acquired on exercise of a stock option may be made in cash, in shares of the Common Stock, or a combination thereof, as the 2002 Plan Administrator may determine.



Stock options are subject to such vesting schedule as determined by the 2002 Plan Administrator and are not exercisable
prior to six months from the date of grant unless, in the case of non-qualified stock options, a shorter period is provided by the 2002 Plan Administrator or other section of the 2002 Plan. No incentive stock option may be exercised later than ten
years after the date of grant. Generally, options are exercisable only while the participant is an employee of the Company. Options remain exercisable for limited periods of time however, following termination of employment because of death,
retirement or permanent disability.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



On May 15, 2003, the Company entered into the 2003 Restructuring. As of May 14, 2003, the Company had $46.7 million outstanding under the Old Credit
Agreement. In addition, at May 14, 2003, the Company



40



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##### Table of Contents

had outstanding $1.9 million in principal and interest under Senior Notes due Heller (a subsidiary of GECC), Midwest and the Companys Chief Executive
Officer at the time, James M. Usdan. Pursuant to the Restructuring:



| |  | The lenders under the Old Credit Agreement, excluding GECC, accepted payment of approximately $16.4 million in full satisfaction of $38.3 million in principal and $2.0 million in
fees that the Company owed the Senior Secured Lenders.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into the Credit Agreement with GECC, as agent, which includes a $12.5 million term loan and a $3.5 million revolving line of credit. Borrowings under the Credit
Agreement include approximately $8.4 million owed to GECC under the Old Credit Agreement, which amount was rolled over to the Credit Agreement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into the Purchase Agreement with Sentinel, GECC (as successor to Heller), Midwest, James M. Usdan and others. Pursuant to this agreement, the Company issued $7.0
million in Subordinated Notes and issued 79,190 shares of Series B Stock. Set forth below is a summary of the amount of securities purchased under the Purchase Agreement and the consideration paid therefor by each holder of capital stock of the
Company entitled to cast more than 10% of the votes at any meeting of the stockholders, and by each of the Companys directors and Named Executive Officers:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                     |  |                                   |  |                     |                 |               |    |                    |  |                |           |  |           
|------------------------------------ |  | --------------------------------- |  | ------------------- | --------------- | ------------- | -- | ------------------ |  | -------------- | --------- |  | ----------
|                                     |  |                                   |  |                     |                 | Consideration
|Purchaser                            |  | Securities Acquired               |  | Amount ofSecurities |                 | Cash          |    | Senior Notes       |  | CommonWarrants
|                                     |  |                                   |  |                     |                
|Sentinel Capital Partners II, L.P.   |  | Series B Stock Subordinated Notes |  | $                   | 55,3866,461,700 |               | $$ | 5,538,6006,461,700 |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|General Electric Capital Corporation |  | Series B Stock                    |  |                     | 5,644           |               |    |                   |  | $              | 564,430   |  | 5,286,489 
|                                     |  |                                   |  |                     |                
|Midwest Mezzanine Fund II, L.P.      |  | Series B Stock                    |  |                     | 5,644           |               |    |                   |  | $              | 564,430   |  | 5,286,489 
|                                     |  |                                   |  |                     |                
|James M. Usdan                       |  | Series B Stock Subordinated Notes |  | $                   | 8,02214,000     |               | $$ | 12,00014,000       |  | $              | 790,203  |  | 7,401,084
|                                     |  |                                   |  |                     |                
|John M. Slack                        |  | Series B Stock Subordinated Notes |  | $                   | 55264,400       |               | $$ | 55,20064,400       |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|Joseph P. Keane                      |  | Series B Stock Subordinated Notes |  | $                   | 303,500         |               | $$ | 3,0003,500         |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|Tim S. Tiffin                        |  | Series B Stock Subordinated Notes |  | $                   | 151,750         |               | $$ | 1,5001,750         |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|Frank A. Baynham                     |  | Series B Stock Subordinated Notes |  | $                   | 22526,250       |               | $$ | 22,50026,250       |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|Ira Glazer                           |  | Series B Stock Subordinated Notes |  | $                   | 12014,000       |               | $$ | 12,00014,000       |  |                |         |  |         
|                                     |  |                                   |  |                     |                
|Edward L. Kuntz                      |  | Series B Stock Subordinated Notes |  | $                   | 46554,250       |               | $$ | 46,50054,250       |  |                |         |  |         
|                                     |  |                                   |  |                     |                 |               |    |                    |  |                |           |  |           
|Total                                |  |                                   |  |                     |                 |               | $  | 12,331,150         |  | $              | 1,919,063 |  | 17,974,062
|                                     |  |                                   |  |                     |                 |               |    |                    |  |                |           |  |           



The issuance and sale
of the Series B Stock and the Subordinated Notes under the Purchase Agreement were subject to a number of conditions precedent, including the following:



| |  | the execution and delivery of a new employment agreement with Mr. Usdan;
| | - | ------------------------------------------------------------------------



41



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| |  | the repayment of the lenders other than GECC under the Old Credit Agreement;
| | - | ----------------------------------------------------------------------------



| |  | the termination of the Stockholders Agreement dated as of July 19, 2002, by and among the Company, Heller, Midwest, the Sellers and Mr. Usdan;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | the termination of Hellers, Midwests, the Sellers and Mr. Usdans rights under the Registration Rights Agreement dated as of July 19, 2002, by and among the
Company, Heller, Midwest, the Sellers, Mr. Usdan and certain of the Companys other stockholders; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the termination of the Investors Agreement dated as of July 19, 2002, by and among the Company, Heller, Midwest and Mr. Usdan.
| | - | ------------------------------------------------------------------------------------------------------------------------------



On June 20, 2003, Sentinel acquired all of the Series B Stock and
Subordinated Notes acquired by Mr. Usdan pursuant to the Purchase Agreement. In addition, the Company acquired all of Mr. Usdans Company common stock and his options were cancelled.



Stockholders Agreement



The Company also entered into a Stockholders Agreement, dated May 15, 2003, with Sentinel, GECC, Midwest, Mr. Fitzpatrick, Mr. Slack and Mr. Usdan (the
Stockholders Agreement). The Stockholders Agreement governs the transfer of Company securities held by the parties to the Stockholders Agreement and prohibits the Company from engaging in financing and other transactions without the
consent of a majority of the Companys securities held by Sentinel on the date of the Stockholders Agreement (Sentinel Shares). In addition, the Stockholders Agreement requires that the number of directors on the Companys
board of directors be increased from five to seven. Each share of Series B Stock issued in connection with the Restructuring is currently convertible into approximately 2,083.89 shares of common stock and votes with the common stock and Series A-1
Stock on an as-converted basis. Each share of Series A-1 Stock is currently convertible into approximately 182.68 shares of common stock and votes with the common stock and Series B Stock on an as-converted basis. As of the record date, there were
8,265,323 shares of common stock, 195,838 Shares of Series A-1 Stock, no shares of Series A-2 Stock, and 79,190 shares of Series B Stock outstanding entitled to cast, in the aggregate, 209,064,532 votes at any meeting of the Companys
stockholders. As of the record date, the following parties to the Stockholders Agreement held the following equity securities, holding the right to cast the following number of votes, which constitute the following percentage of total votes entitled
to be cast at any meeting of the Companys stockholders:



|                                     |  |                  |  |                  |  |                           |  |                           |  
|------------------------------------ |  | ---------------- |  | ---------------- |  | ------------------------- |  | ------------------------- | -
|Name                                 |  | Securities Held  |  | Number of Shares |  | Votes Entitled to be Cast |  | Percentage of Total Votes |  
|Sentinel Capital Partners II, L.P.   |  | Series B Stock   |  | 63,408           |  | 132,134,987               |  | 63.2                      | %
|General Electric Capital Corporation |  | Series B Stock   |  | 5,644            |  | 11,761,447                |  |                           |  
|                                     |  | Series A-1 Stock |  | 119,520          |  | 21,834,324                |  | 16.1                      | %
|Midwest Mezzanine Fund II, L.P.      |  | Series B Stock   |  | 5,644            |  | 11,761,447                |  |                           |  
|                                     |  | Series A-1 Stock |  | 59,760           |  | 10,917,162                |  | 10.8                      | %
|Thomas P. Fitzpatrick                |  | Series B Stock   |  | 1,152            |  | 2,400,635                 |  | 1.1                       | %
|John M. Slack                        |  | Series B Stock   |  | 552              |  | 1,150,304                 |  |                           |  
|                                     |  | Common Stock     |  | 14,500           |  | 14,500                    |  | 0.5                       | %
|                                     |  |                  |  |                  |  |                           |  |                           |  
|Total:                               |  |                  |  |                  |  | 191,974,806               |  | 91.8                      | %
|                                     |  |                  |  |                  |  |                           |  |                           |  



There were two
closings under the Purchase Agreement, May 15, 2003 and September 30, 2003. All of the persons who purchased Series B Stock on September 30, 3003, also became parties to the Stockholders Agreement (the Subsequent Parties), but are not
obligated to vote in accordance with the terms therewith. The parties to the Stockholders Agreement other than the Subsequent Parties (the Original Parties) have



42



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agreed to vote all of the capital stock owned by them in favor of certain designees to the Companys board of directors. Because the Original Parties
hold a majority of the voting power of the Companys outstanding securities, all of the Companys directors are selected pursuant to the Stockholders Agreement. Pursuant to the Stockholders Agreement, holders of a majority of the Sentinel
Shares are entitled to designate four directors to the Companys board of directors, holders of a majority of the shares of Company securities subject to the Stockholders Agreement, other than the Sentinel Shares, are entitled to designate two
directors to the Companys board of directors, and the Companys Chief Executive Officer is entitled to serve as a director. At the closing of the Restructuring: (a) Sentinel designated David S. Lobel, Mr. Fitzpatrick, Paul F. Murphy, and
Edward Kuntz, an existing director, as directors; (b) the holders of a majority of the Companys securities subject to the Stockholders Agreement other than Sentinel designated Frank A. Baynham and Ira Glazer, two existing directors, as
directors; and (c) James M. Usdan, the Chief Executive Officer, continued in his position as a director. In accordance with the requirements of Section 14(f) of the Exchange Act of 1934 (the Exchange Act) and Rule 14f-1 thereunder, the
new directors designated by Sentinel (the Sentinel Designees) were to take office on June 21, 2003, the tenth day following the mailing of an information statement to the Companys stockholders.



On June 13, 2003, Mr. Usdan, President, Chief Executive Officer, and a member
of the Companys board of directors, resigned from all of his positions as an officer and director. Mr. Slack, the Companys Senior Vice President and Chief Administrative Officer was appointed as interim Chief Executive Officer. On June
19, 2003, Mr. Fitzpatrick informed the Company that he could not become a member of the Companys board of directors on June 21, 2003, when the other Sentinel Designees were to become members of the Companys board of directors.
Accordingly, since June 21, the Companys board of directors consists of Messrs. Kuntz, Baynham, Glazer, Lobel and Murphy, the position reserved for the Chief Executive Officer is vacant and one of the positions to which Sentinel is entitled
designate a director is vacant. Sentinel has the right to designate a fourth director to the board at any time. While Sentinel has not designated an additional director at this time, it may do so at any time in the future.



The Stockholders Agreement provides that the following actions require the
approval of holders of a majority of the Sentinel Shares:



| |  | amending the terms of the Series B Stock, issuing any capital stock that ranks senior or pari passu to the Series B Stock, or entering into any agreement that would restrict the
Companys ability to comply with the terms of the Series B Stock;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | issuing any convertible securities other than currently outstanding convertible securities or options issued pursuant to the 2002 Plan;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | paying dividends with respect to any of the Companys securities held by parties to the Stockholders Agreement;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | amending the Companys Certificate of Incorporation or Bylaws;
| | - | --------------------------------------------------------------



| |  | materially amending the Companys Credit Agreement;
| | - | ---------------------------------------------------



| |  | entering into any transaction that results in the sale of substantially all of the Companys assets or in any person or entity, other than Sentinel, becoming the beneficial
owner of more than 50% of the Companys voting securities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | incurring more than $1 million in indebtedness not approved in an annual budget by the board of directors;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | voluntarily liquidating the Company;
| | - | ------------------------------------



| |  | acquiring an interest or making an investment in any company or business;
| | - | -------------------------------------------------------------------------



| |  | entering into or amending any agreements, other than compensation agreements, with any person holding at least 2% of the Companys common stock;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | terminating the employment of any senior executive officer.
| | - | -----------------------------------------------------------



In the event that the board of directors and Sentinel, as long as Sentinel owns a majority of the Sentinel Shares, approves a Sale of the Company (an
Approved Sale), all of the parties to the Stockholders Agreement have agreed to consent to such Sale of the Company, and if required, sell their Company securities pursuant to such transaction. In the event of an Approved Sale, each
party to the Stockholders



43



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Agreement has agreed to receive in exchange for the capital stock held by such stockholder the same portion of the aggregate consideration from such sale or
exchange that such stockholder would have received if such aggregate consideration had been distributed by the Company in complete liquidation pursuant to the rights and preferences set forth in the Companys Certificate of Incorporation. For
purposes of the Stockholders Agreement a Sale of the Company is defined as transaction that results in the sale of substantially all of the Companys assets or that results in the holders of the Companys common stock, on a
fully diluted basis, immediately prior to such transaction owning less than 50% of the Companys common stock, on a fully diluted basis, following such transaction.



The Stockholders Agreement further provides that if a majority of the Series B Stock is converted into common stock, all of
the parties to the Stockholders Agreement will immediately convert all Series A-1 Stock, Series A-2 Stock and Series B Stock held by such parties into common stock.



The Company has also granted preemptive rights to the parties to the Stockholders Agreement permitting such persons to
participate in any offering of the Companys equity securities pursuant to the terms of such offering in an amount that will permit each such person to retain its same percentage interest in the Companys capital stock. The preemptive
rights granted by the Company are inapplicable to issuances to officers, directors and employees, to issuances made by the Company in connection with the acquisition of another business entity, or if the holders of a majority of the Sentinel Shares
designate preemptive rights to be inapplicable to such issuance.



No party to the Stockholders Agreement may sell, transfer, assign, pledge or otherwise dispose of (a Transfer) (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest
in such partys equity securities in the Company, except (i) subject to tag-along rights in favor of each other party to the Stockholders Agreement, (ii) in a Public Sale (as defined below), (iii) pursuant to an Approved Sale (as
described above), or (iv) to a Permitted Transferee. Public Sale means any sale to the public pursuant to an offering registered under the Securities Act or to the public effected through a broker, dealer or market maker pursuant to the
provisions of Rule 144 under the Securities Act. Permitted Transferees include: (i) other parties to the Stockholders Agreement, (ii) any descendent by will or intestate transfer and any member of such Stockholders Family Group (as defined in
the Stockholders Agreement), or (iii) in the case of an entity, (x) its affiliates, partners or employees, or consultants, or (y) any of the Companys employees, directors or affiliates. Since all of the parties to the Stockholders Agreement
will receive the same consideration for their voting stock in the merger, the merger is permitted by the Stockholders Agreement.



Registration Rights Agreement



On May 15, 2003, the Company entered into a Registration Rights Agreement with Sentinel, GECC, Midwest, Mr. Fitzpatrick, Mr. Slack and Mr. Usdan (the
Registration Rights Agreement). The Registration Rights Agreement obligates the Company to register for resale with the Securities and Exchange Commission (the SEC) the common stock issuable upon conversion of the
Companys equity securities held by the parties to the Registration Rights Agreement upon request by the parties thereto. The holders of a majority of the securities issued to Sentinel pursuant to the Purchase Agreement can require the Company
to file up to four registration statements registering the shares subject to the Registration Rights Agreement with the SEC. In addition, the parties to the Registration Rights Agreement are granted piggy-back rights to register such
common stock on any registration statements filed by the Company for the purpose of publicly offering securities.



Management Agreement



The Company and Sentinel also entered into a Management Agreement, dated May 15, 2003 (Sentinel Management Agreement), in connection with
Sentinels acquisition of securities pursuant to the Purchase Agreement. The Sentinel Management Agreement obligates Sentinel to provide strategic financial planning, advisory and consulting services related to the selection of independent
auditors, legal counsel and investment bankers, as well as other consulting services. In the event that Sentinel provides financial advisory services related to acquisitions and divestitures, hiring of executive personnel, refinancings, or sales of
stock, Sentinel



44



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##### Table of Contents

will be entitled to additional compensation. In connection with 2003 Restructuring, Sentinel was paid a fee in the amount of $580,000 for services rendered
in negotiating the agreement.



The Sentinel Management
Agreement required the Company to pay Sentinel a $485,000 consulting fee, plus expenses, in connection with the acquisition of securities pursuant to the Purchase Agreement. The annual consulting fee payable to Sentinel pursuant to the Sentinel
Management Agreement is $275,000. The consulting fee increases to $300,000 per year after the date that the Companys EBITDA (as defined in the Credit Agreement) exceeds $10 million for the preceding twelve months. If Sentinel holds less than
50% of the shares of common stock held by Sentinel on a fully diluted basis as of the date of the Sentinel Management Agreement, the fees payable to Sentinel will be prorated based on the number of fully diluted shares of common stock held by
Sentinel on such date.



In September 2003, the Company acquired
615,033, 121,708, and 176,502 shares of Common Stock from Delaware State 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. for $.12 per share in cash.



On May 15, 2003, the
Company entered into a five-year employment agreement with Mr. Usdan, replacing the employment agreement with Mr. Usdan entered into on July 19, 2002. The employment agreement provided that Mr. Usdan be elected as a member of the Board of Directors
as long as he is the Chief Executive Officer. The employment agreement provided for a base annual salary of $375,000. Mr. Usdan was eligible for an annual bonus determined by the Compensation Committee based upon the achievement of performance
objectives to be established by the Compensation Committee. Mr. Usdan was entitled to reimbursement of expenses, and to participate in all benefit, incentive, insurance, disability and other similar plans provided by the Company. On June 13, 2003,
the Company entered into a General Release and Severance Agreement (Severance Agreement) with Mr. Usdan whereby the Company agreed to pay him the following amounts owed under his employment agreement: (a) $18,000 for two and one-half
weeks accrued but unused vacation; (b) a $30,000 bonus earned in connection with the Restructuring; (c) $53,250 in earned deferred salary from 2002; and (d) for up to $5,000 in expenses for which he was entitled to reimbursement. In addition, the
Company agreed from June 14, 2003 through June 13, 2004 to pay Mr. Usdan as severance payments $31,250.00 per month. If the Company elects to extend the term of his non-compete covenant, the Company must pay Mr. Usdan $31,250.00 per month from June
14, 2004 through June 13, 2005.



Pursuant to the Severance
Agreement, Mr. Usdan agreed to waive all claims he might have against the Company and he surrendered all stock options previously granted to him. He also agreed to the termination of all of his rights under his Employment Agreement, the Purchase
Agreement, the Stockholders Agreement and the Registration Rights Agreement. Pursuant to a separate Securities Purchase Agreement executed on June 13, 2003: (a) Mr. Usdan sold to Sentinel 8,022 shares of Series B Preferred Stock and $14,000 in Notes
for an aggregate purchase price of $726,000 in cash; and (b) Mr. Usdan sold to the Company 90,000 shares of Common Stock for a purchase price of $11,780 in cash.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



Fees Paid to Independent Public Accountants



The Audit Committee has reviewed the audit and non-audit fees that the Company has paid to the independent public accountants for purposes of
considering whether such fees are compatible with maintaining the auditors independence.



Audit Fees. Fees for services rendered by PricewaterhouseCoopers LLP for the reviews of Forms 10-Q and for the audits of the financial statements of the Company were $245,700 for 2002 and $291,000 for 2003.



Audit-Related Fees. The aggregate fees billed for all
audit-related services rendered by PricewaterhouseCoopers LLP to the Company consisted of $40,800 of fees for 2002 and $30,900 for 2003.



45



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##### Table of Contents

Specific services for the Company in both years include consultations, financial accounting and reporting standards.



Tax Related Fees. Aggregate fees billed for all tax related services
rendered by PricewaterhouseCoopers LLP to the Company consisted of $107,700 in 2002 and $141,000 in 2003.



The Audit Committee has adopted a pre-approval policy regarding audit and non-audit fees. The policy provides that the Audit Committee is to pre-approve
the audit and non-audit services performed by the independent auditor to assure that the provision of such services does not impair the auditors independence. The services to be pre-approved under the policy include annual audit services
provided by the independent auditor, services which are reasonably related to the performance of the review or audit of the Companys financial statements by the independent auditor, tax services and all other related services. The Audit
Committee periodically establishes pre-approval levels for all services to be provided by the independent auditor under the policy. Any proposed services which exceed these pre-approval levels require specific pre-approval by the Audit Committee.



46



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##### Table of Contents

PART IV



|Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K
|-------- | ---------------------------------------------------------------



(a) (1) Financial Statements



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



|                                                                                                                |  |    
|--------------------------------------------------------------------------------------------------------------- |  | ---
|                                                                                                                | 
|Report of Independent Auditors                                                                                  |  | F-2
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                                    |  | F-3
|                                                                                                                | 
|Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003                      |  | F-4
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2001, 2002 and 2003 |  | F-5
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003                      |  | F-6
|                                                                                                                | 
|Notes to Financial Statements                                                                                   |  | F-7



(a) (2) Financial Statement
Schedules



The following Financial Statement Schedule and the Report of
Independent Auditors on Financial Statement Schedule are included in this report on the pages indicated:



|                                                                    |  |     
|------------------------------------------------------------------- |  | ----
|                                                                    |  | Page
|                                                                    | 
|Report of Independent Auditors 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.



|                |  |    
|--------------- |  | ---
|                | 
|Code of Ethics. |  | A-1



(a) (3) Exhibits



The exhibits to this report, other than the Code of Ethics, 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



Current Report on Form 8-K filed November 13, 2003



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##### Table of Contents

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 March 30, 2004.



CASTLE DENTAL CENTERS, INC.By:

/s/    JOHN M. SLACKJohn M. Slack Interim Chief Executive Officer




POWER OF
ATTORNEY



We, the undersigned, directors and officers of
Castle Dental Centers, Inc.(Company), do hereby severally constitute and appoint John M. Slack 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, 2003, 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/    JOHN M.
SLACKJohn M.
Slack       |  | Interim Chief Executive Officer                                                             |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    JOSEPH P.
KEANEJoseph P.
Keane   |  | Senior Vice-President, Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    DAVID S.
LOBELDavid S.
Lobel     |  | Director                                                                                    |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    PAUL F.
MURPHYPaul F.
Murphy     |  | Director                                                                                    |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    FRANK A.
BAYNHAMFrank A.
Baynham |  | Director                                                                                    |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    IRA
GLAZERIra Glazer             |  | Director                                                                                    |  | March 30, 2004
|                                        |  |                                                                                            
|/s/    EDWARD L.
KUNTZEdward L.
Kuntz   |  | Director                                                                                    |  | March 30, 2004



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CASTLE DENTAL CENTERS, INC.

INDEX TO FINANCIAL STATEMENTS



|                                                                                                                    |  |     
|------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                    |  | Page
|Audited Financial Statements                                                                                        |  |     
|                                                                                                                    | 
|Report of Independent Auditors                                                                                      |  | F-2 
|                                                                                                                    | 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                                        |  | F-3 
|                                                                                                                    | 
|Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2001, 2002 and 2003 |  | F-4 
|                                                                                                                    | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2001, 2002 and 2003     |  | F-5 
|                                                                                                                    | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                          |  | F-6 
|                                                                                                                    | 
|Notes to Consolidated Financial Statements                                                                          |  | F-7 



F-1



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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



To the Board of
Directors and

Stockholders of Castle Dental Centers, Inc.:



In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in
stockholders equity, and cash flows present fairly in all material respects, the financial position of Castle Dental Centers, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, 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.



Our report, dated April 4, 2003, identified that substantial doubt existed
about the Companys ability to continue as a going concern. The Company has completed steps during 2003 to reduce its debt service requirements and to improve its operating results, which has alleviated that doubt for 2004. See Notes 2 and 3
for a discussion of the Companys liquidity situation.



PricewaterhouseCoopers LLP



March 30, 2004



F-2



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                                                                                                             |  | December 31, |        
|                                                                                                                                                                                                                                                                                                             |  | 2002         |         |   | 2003 |  
|ASSETS                                                                                                                                                                                                                                                                                                       |  |              |         |   |      |   |         |  
|Current assets:                                                                                                                                                                                                                                                                                              |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                    |  | $            | 1,522   |   |      | $ | 513     |  
|Patient receivables, net of allowance for uncollectible accounts of $16,946 and $19,632 in 2002 and 2003, respectively                                                                                                                                                                                       |  |              | 6,362   |   |      |   | 6,130   |  
|Unbilled patient receivables, net of allowance for uncollectible accounts of $703 and $643 in 2002 and 2003, respectively                                                                                                                                                                                    |  |              | 2,650   |   |      |   | 2,409   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                                                    |  |              | 1,438   |   |      |   | 1,048   |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                                                                                                                                                         |  |              | 11,972  |   |      |   | 10,100  |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Property and equipment, net                                                                                                                                                                                                                                                                                  |  |              | 11,273  |   |      |   | 9,194   |  
|Intangibles, net                                                                                                                                                                                                                                                                                             |  |              | 14,900  |   |      |   | 14,846  |  
|Deferred income taxes                                                                                                                                                                                                                                                                                        |  |              |        |   |      |   | 5,618   |  
|Other assets                                                                                                                                                                                                                                                                                                 |  |              | 2,811   |   |      |   | 1,816   |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                                                                                                                                 |  | $            | 40,956  |   |      | $ | 41,574  |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Current liabilities:                                                                                                                                                                                                                                                                                         |  |              |         |   |      |   |         |  
|Revolving line of credit                                                                                                                                                                                                                                                                                     |  | $            |        |   |      | $ | 379     |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                            |  |              | 2,276   |   |      |   | 1,510   |  
|Accounts payable, trade                                                                                                                                                                                                                                                                                      |  |              | 2,937   |   |      |   | 2,322   |  
|Accrued liabilities                                                                                                                                                                                                                                                                                          |  |              | 8,499   |   |      |   | 8,272   |  
|Deferred income taxes                                                                                                                                                                                                                                                                                        |  |              |        |   |      |   | 1,056   |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                                                                                                                                    |  |              | 13,712  |   |      |   | 13,539  |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Long-term debt, net of current portion                                                                                                                                                                                                                                                                       |  |              | 47,219  |   |      |   | 17,600  |  
|Other long-term liabilities                                                                                                                                                                                                                                                                                  |  |              | 1,935   |   |      |   |        |  
|Commitments and contingencies                                                                                                                                                                                                                                                                                |  |              |         |   |      |   |         |  
|Stockholders equity (deficit):                                                                                                                                                                                                                                                                              |  |              |         |   |      |   |         |  
|Preferred Stock, $0.001 and $0.000001 par value at December 31, 2002 and 2003, respectively, 1,000,000 shares authorized, 211,282 and 195,838
shares Series A-1 issued and outstanding at December 31, 2002 and 2003, respectively and 79,190 shares of Series B issued and outstanding at December 31, 2003 |  |              |        |   |      |   |        |  
|Common stock, $0.001 and $0.000001 par value at December 31, 2002 and 2003, respectively, 250,000,000 shares authorized, 6,417,206 and
8,265,323 shares issued and outstanding at December 31, 2002 and 2003, respectively                                                                                   |  |              | 6       |   |      |   |        |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                   |  |              | 46,575  |   |      |   | 53,178  |  
|Deferred compensation                                                                                                                                                                                                                                                                                        |  |              |        |   |      |   | (356    | )
|Accumulated deficit                                                                                                                                                                                                                                                                                          |  |              | (68,491 | ) |      |   | (42,387 | )
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                                                                                                                                         |  |              | (21,910 | ) |      |   | 10,435  |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                                                                                         |  | $            | 40,956  |   |      | $ | 41,574  |  
|                                                                                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  



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



F-3



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)



|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                      |  | Year Ended December 31, |        
|                                                                                                      |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|Net patient revenues                                                                                  |  | $                       | 97,924  |   |      | $ | 100,866 |      |  | $ | 93,889  |  
|Expenses:                                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Dentist salaries and other professional costs                                                         |  |                         | 27,091  |   |      |   | 29,376  |      |  |   | 27,634  |  
|Clinical salaries                                                                                     |  |                         | 19,956  |   |      |   | 21,698  |      |  |   | 18,554  |  
|Dental supplies and laboratory fees                                                                   |  |                         | 11,760  |   |      |   | 11,607  |      |  |   | 10,342  |  
|Rental and lease expense                                                                              |  |                         | 6,433   |   |      |   | 5,969   |      |  |   | 5,882   |  
|Advertising and marketing                                                                             |  |                         | 3,283   |   |      |   | 2,625   |      |  |   | 2,892   |  
|Depreciation and amortization                                                                         |  |                         | 6,593   |   |      |   | 3,614   |      |  |   | 3,088   |  
|Other operating expenses                                                                              |  |                         | 8,016   |   |      |   | 7,889   |      |  |   | 7,204   |  
|Bad debt expense                                                                                      |  |                         | 4,948   |   |      |   | 4,751   |      |  |   | 3,864   |  
|General and administrative                                                                            |  |                         | 11,291  |   |      |   | 10,217  |      |  |   | 10,250  |  
|Restructuring costs and other charges                                                                 |  |                         | 2,329   |   |      |   | 4,256   |      |  |   | 835     |  
|Asset impairment                                                                                      |  |                         | 2,929   |   |      |   | 3,356   |      |  |   |        |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                                                        |  |                         | 104,629 |   |      |   | 105,358 |      |  |   | 90,545  |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating income (loss)                                                                               |  |                         | (6,705  | ) |      |   | (4,492  | )    |  |   | 3,344   |  
|Interest expense                                                                                      |  |                         | 7,960   |   |      |   | 5,627   |      |  |   | 3,206   |  
|Other (income) / expense                                                                              |  |                         | (68     | ) |      |   | (33     | )    |  |   | 52      |  
|Gain on early extinguishment of debt                                                                  |  |                         |        |   |      |   | (17,334 | )    |  |   | (21,856 | )
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before benefit for income taxes and cumulative effect of change in accounting principle |  |                         | (14,597 | ) |      |   | 7,248   |      |  |   | 21,942  |  
|Benefit for income taxes                                                                              |  |                         |        |   |      |   | (161    | )    |  |   | (4,162  | )
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                              |  |                         | (14,597 | ) |      |   | 7,409   |      |  |   | 26,104  |  
|Cumulative effect of change in accounting principle, net of tax                                       |  |                         | (250    | ) |      |   | (37,000 | )    |  |   |        |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                     |  | $                       | (14,847 | ) |      | $ | (29,591 | )    |  | $ | 26,104  |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) per common share, basic and diluted:                                                    |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                              |  | $                       | (2.27   | ) |      | $ | 0.20    |      |  | $ | 0.16    |  
|Cumulative effect of change in accounting principle                                                   |  |                         | (0.04   | ) |      |   | (0.99   | )    |  |   |        |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                     |  | $                       | (2.31   | ) |      | $ | (0.79   | )    |  | $ | 0.16    |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Weighted average number of common and common equivalent shares outstanding                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic                                                                                                 |  |                         | 6,417   |   |      |   | 37,202  |      |  |   | 159,078 |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                                               |  |                         | 6,417   |   |      |   | 37,202  |      |  |   | 162,559 |  
|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  



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



F-4



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)



|                                                            |  |                 |   |              |        |   |                            |           |   |                        |   |    |                     |  |   |                               |   |  |   |      |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------- | - | ------------ | ------ | - | -------------------------- | --------- | - | ---------------------- | - | -- | ------------------- |  | - | ----------------------------- | - |  | - | ---- | - |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Preferred Stock |   | Common Stock |        |   | Additional Paid-in Capital |           |   | Deferred Compen-sation |   |    | Accumulated Deficit |  |   | Stockholders Equity(Deficit) |  
|                                                            |  | Shares          |   |              | Amount |   | Shares                     |           |   | Amount                 |   |    |                     |  |  
|Balance, January 1, 2001                                    |  |                |   |              | $      |  |                            | 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   |  
|Issuance of preferred stock                                 |  | 211,282         |   |              |        |  |                            |          |   |                        |   |   |                     |  |   | 3,840                         |   |  |   |     |   |  |   |        |   |  |   | 3,840   |  
|Issuance of warrants                                        |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   | 649                           |   |  |   |     |   |  |   |        |   |  |   | 649     |  
|Net loss                                                    |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   |                              |   |  |   |     |   |  |   | (29,591 | ) |  |   | (29,591 | )
|                                                            |  |                 |   |              |        |   |                            |           |   |                        |   |    |                     |  |   |                               |   |  |   |      |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2002                                  |  | 211,282         |   |              |        |  |                            | 6,417,206 |   |                        |   | 6  |                     |  |   | 46,575                        |   |  |   |     |   |  |   | (68,491 | ) |  |   | (21,910 | )
|Change in common stock par value                            |  |                |   |              |        |  |                            |          |   |                        |   | (6 | )                   |  |   | 6                             |   |  |   |     |   |  |   |        |   |  |   |        |  
|Issuance of series B preferred stock, net of issuance costs |  | 79,190          |   |              |        |  |                            |          |   |                        |   |   |                     |  |   | 6,951                         |   |  |   |     |   |  |   |        |   |  |   | 6,951   |  
|Purchase and cancellation of warrants                       |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   | (625                          | ) |  |   |     |   |  |   |        |   |  |   | (625    | )
|Purchase and cancellation of Company common stock           |  |                |   |              |        |  |                            | (973,243  | ) |                        |   |   |                     |  |   | (117                          | ) |  |   |     |   |  |   |        |   |  |   | (117    | )
|Conversion of Series A-1 to common stock                    |  | (15,444         | ) |              |        |  |                            | 2,821,360 |   |                        |   |   |                     |  |   |                              |   |  |   |     |   |  |   |        |   |  |   |        |  
|Issuance of stock options below fair market value           |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   | 388                           |   |  |   | (388 | ) |  |   |        |   |  |   |        |  
|Amortization of deferred compensation                       |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   |                              |   |  |   | 32   |   |  |   |        |   |  |   | 32      |  
|Net income                                                  |  |                |   |              |        |  |                            |          |   |                        |   |   |                     |  |   |                              |   |  |   |      |   |  |   | 26,104  |   |  |   | 26,104  |  
|                                                            |  |                 |   |              |        |   |                            |           |   |                        |   |    |                     |  |   |                               |   |  |   |      |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2003                                  |  | 275,028         |   |              | $      |  |                            | 8,265,323 |   |                        | $ |   |                     |  | $ | 53,178                        |   |  | $ | (356 | ) |  | $ | (42,387 | ) |  | $ | 10,435  |  
|                                                            |  |                 |   |              |        |   |                            |           |   |                        |   |    |                     |  |   |                               |   |  |   |      |   |  |   |         |   |  |   |         |  



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



F-5



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | Year Ended December 31, |        
|                                                               |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|Cash flows from operating activities:                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                              |  | $                       | (14,847 | ) |      | $ | (29,591 | )    |  | $ | 26,104  |  
|Adjustments:                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Provisions for bad debts                                       |  |                         | 4,948   |   |      |   | 4,751   |      |  |   | 3,864   |  
|Depreciation and amortization                                  |  |                         | 6,593   |   |      |   | 3,614   |      |  |   | 3,088   |  
|Deferred income taxes                                          |  |                         |        |   |      |   |        |      |  |   | (4,562  | )
|Amortization of loan cost                                      |  |                         | 567     |   |      |   | 745     |      |  |   | 562     |  
|Accretion of debt discount                                     |  |                         |        |   |      |   | 62      |      |  |   | 55      |  
|Asset impairment                                               |  |                         | 2,929   |   |      |   | 3,356   |      |  |   |        |  
|Interest paid-in kind                                          |  |                         |        |   |      |   |        |      |  |   | 857     |  
|Amortization of stock option compensation                      |  |                         |        |   |      |   |        |      |  |   | 32      |  
|Cumulative effect of change in accounting principle            |  |                         | 250     |   |      |   | 37,000  |      |  |   |        |  
|Gain on early extinguishment of debt                           |  |                         |        |   |      |   | (17,334 | )    |  |   | (21,856 | )
|Loss on disposal of property and equipment                     |  |                         |        |   |      |   |        |      |  |   | 5       |  
|Changes in operating assets and liabilities:                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Patient receivables                                            |  |                         | (867    | ) |      |   | (6,317  | )    |  |   | (3,692  | )
|Unbilled patient receivables                                   |  |                         | 104     |   |      |   | 165     |      |  |   | 289     |  
|Prepaid expenses and other current assets                      |  |                         | 521     |   |      |   | (65     | )    |  |   | 390     |  
|Other assets                                                   |  |                         | 614     |   |      |   | 31      |      |  |   | (44     | )
|Accounts payable trade                                         |  |                         | 526     |   |      |   | (176    | )    |  |   | (690    | )
|Accrued liabilities                                            |  |                         | 3,100   |   |      |   | 1,434   |      |  |   | (82     | )
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities            |  |                         | 4,438   |   |      |   | (2,325  | )    |  |   | 4,320   |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows used in investing activities:                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Capital expenditures                                           |  |                         | (910    | ) |      |   | (873    | )    |  |   | (980    | )
|Proceeds from sale of property and equipment                   |  |                         |        |   |      |   | 296     |      |  |   |        |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                          |  |                         | (910    | ) |      |   | (577    | )    |  |   | (980    | )
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Proceeds from debt                                             |  |                         |        |   |      |   | 1,700   |      |  |   | 12,383  |  
|Repayment of debt                                              |  |                         | (358    | ) |      |   | (565    | )    |  |   | (19,804 | )
|Proceeds from issuance of Series B Preferred Stock             |  |                         |        |   |      |   |        |      |  |   | 6,000   |  
|Repurchase warrants issued to acquire Series A Preferred Stock |  |                         |        |   |      |   |        |      |  |   | (550    | )
|Purchase Company common stock                                  |  |                         |        |   |      |   |        |      |  |   | (117    | )
|Debt and equity issuance costs                                 |  |                         | (92     | ) |      |   | (690    | )    |  |   | (2,261  | )
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities            |  |                         | (450    | ) |      |   | 445     |      |  |   | (4,349  | )
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net change in cash and cash equivalents                        |  |                         | 3,078   |   |      |   | (2,457  | )    |  |   | (1,009  | )
|Cash and cash equivalents, beginning of period                 |  |                         | 901     |   |      |   | 3,979   |      |  |   | 1,522   |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of period                       |  | $                       | 3,979   |   |      | $ | 1,522   |      |  | $ | 513     |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |         |  



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



F-6



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|-- | ----------------------------------------------------------------------



Corporate Organization and Basis of Presentation



The Company provides 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 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, 2003, 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 of 30.0% of net patient revenues; plus a bonus equal to 30.0% 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 performed and recognized over the remainder of the contract. Billings under each contract, which average approximately 26 30 months, are made equally throughout the term of the contract, with final payment at
the completion of the treatment.



F-7



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 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 $9.6 million, $9.2 million and $8.2 million in 2001, 2002 and 2003, 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. This managed care contract accounted for $7.2 million in
revenues ($3.3 million in capitation payments and $3.9 million in patient co-payments) in 2002, equal to 7.1% of total net patient revenues. This managed care contract accounted for $6.5 million in revenues ($2.8 million in capitation payments and
$3.7 million in patient co-payments) in 2003, equal to 6.9% 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, 2003, 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 a 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 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 



In August 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Management reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset or group of assets may not be recoverable in accordance with the provisions of SFAS No. 144. SFAS No. 144 requires that long-lived assets to be held and used be reported at the lower of their carrying amount or fair value. Assets to be
disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of their carrying amount or fair value less estimated cost to sell. The Companys adoption of SFAS No. 144 on



F-8



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



January 1, 2002, did not have a material impact on the Companys financial position and results of operations. As of December 31, 2003, management of
the Company believes that its long-lived assets are realizable and that no impairment allowance is necessary.



Intangible Assets



The Companys acquisitions involved the purchase of tangible and intangible assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocated the purchase price to the tangible assets acquired and liabilities assumed, based on estimated fair market values. In connection with each acquisition, the Company enters into a
long-term management services agreement with each affiliated dental practice, which cannot be terminated by either party without cause. Prior to January 1, 2002, the cost of the management services agreements were amortized on a straight line basis
over their term, or such shorter period as may have been indicated by the facts and circumstances. Amortization periods of the management services agreements acquired through December 31, 2001 were 25 years. Effective January 1, 2002, the Company
adopted SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets, and reclassified approximately $54.9 million from management services agreements to goodwill. Under SFAS 142, substantially all of the Companys goodwill is no
longer amortized, and the Company must perform an annual impairment test for goodwill and intangible assets. The Company allocates goodwill to its four reporting units. SFAS 142 requires the Company to compare the fair value of the reporting unit to
its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent of that difference. The Company based
the fair values of its reporting units on discounted cash flow methodology and other company comparisons. Under SFAS 142, the Company recorded a transitional goodwill impairment charge of $37.0 million, presented as a cumulative effect of accounting
change at the beginning of 2002. This transitional goodwill impairment charge was attributable to market declines in its reporting units in Texas, Florida, California and Tennessee. The Company recorded a $3.0 million impairment charge for the year
ended December 31, 2002, as a result of lower than projected earnings in the California and Florida units. For the year ended December 31, 2003, the Company did not incur an impairment on any of its reporting units.



The following unaudited pro forma information presents the income (loss) and
income (loss) per common share adjusted for SFAS No. 142 (in thousands):



|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------
|                                                                                  |  | For the Year Ended December 31,
|                                                                                  |  | 2001                            |         |   | 2002 |   |         | 2003
|Income (loss):                                                                    |  |                                 |         |   |      |   |         |      |  |   |       
|Reported income (loss) before cumulative effect of change in accounting principle |  | $                               | (14,597 | ) |      | $ | 7,409   |      |  | $ | 26,104
|Add back: goodwill amortization, net of tax                                       |  |                                 | 2,731   |   |      |   |        |      |  |   |      
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|Adjusted income (loss) before cumulative effect of change in accounting principle |  |                                 | (11,866 | ) |      |   | 7,409   |      |  |   | 26,104
|Cumulative effect of change in accounting principle                               |  |                                 | (250    | ) |      |   | (37,000 | )    |  |   |      
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|Adjusted net income (loss)                                                        |  | $                               | (12,116 | ) |      | $ | (29,591 | )    |  | $ | 26,104
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|Income (loss) per common share, basic and diluted:                                |  |                                 |         |   |      |   |         |      |  |   |       
|Reported income (loss) before cumulative effect of change in accounting principle |  | $                               | (2.27   | ) |      | $ | 0.20    |      |  | $ | 0.16  
|Add back: goodwill amortization, net of tax                                       |  |                                 | 0.43    |   |      |   |        |      |  |   |      
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|Adjusted income (loss) before cumulative effect of change in accounting principle |  |                                 | (1.84   | ) |      |   | 0.20    |      |  |   | 0.16  
|Cumulative effect of change in accounting principle                               |  |                                 | (0.04   | ) |      |   | (0.99   | )    |  |   |      
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       
|Adjusted net income (loss)                                                        |  | $                               | (1.88   | ) |      | $ | (0.79   | )    |  | $ | 0.16  
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |       



F-9



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The changes in the carrying amount of goodwill for the year ended December 31, 2002 were as follows:



|                                                    |  |       |         |   |         |   |        |           |  |   |            |   |  |       |        |   |  |   |         |  
|--------------------------------------------------- |  | ----- | ------- | - | ------- | - | ------ | --------- |  | - | ---------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                    |  | Texas |         |   | Florida |   |        | Tennessee |  |   | California |   |  | Total |       
|Balance at December 31, 2001                        |  | $     | 29,225  |   |         | $ | 4,733  |           |  | $ | 4,323      |   |  | $     | 16,557 |   |  | $ | 54,838  |  
|Cumulative effect of change in accounting principle |  |       | (22,600 | ) |         |   | (2,900 | )         |  |   | (1,900     | ) |  |       | (9,600 | ) |  |   | (37,000 | )
|Impairment charge                                   |  |       |        |   |         |   | (900   | )         |  |   |           |   |  |       | (2,100 | ) |  |   | (3,000  | )
|                                                    |  |       |         |   |         |   |        |           |  |   |            |   |  |       |        |   |  |   |         |  
|Balance at December 31, 2002                        |  | $     | 6,625   |   |         | $ | 933    |           |  | $ | 2,423      |   |  | $     | 4,857  |   |  | $ | 14,838  |  
|                                                    |  |       |         |   |         |   |        |           |  |   |            |   |  |       |        |   |  |   |         |  



There were no changes
for the year ended December 31, 2003, as the Company did not recognize impairment on any of its reporting units.



Other Assets



Other assets consist primarily of debt issuance costs and deposits. 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 $0.4 million and $0.2 million as of December 31, 2002 and 2003, respectively. During 2003, the Company
restructured certain debt (Note 2) and accordingly wrote-off net loan costs, related to the extinguished debt facility, of approximately $2.1 million, consisting of $2.8 million in costs and $0.7 million in accumulated amortization.



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 expected to be in effect when the deferred assets and
liabilities are utilized.



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.



Accounting for Stock-Based Compensation



The Company accounts for its stock-based compensation plans in accordance
with APB 25, Accounting for Stock Issued to Employees (APB 25). In accordance with the provisions of APB 25, stock-based employee compensation cost is not reflected in net income for options granted at an exercise price equal
to or in excess of the market value of the underlying Common Stock on the date of grant. The Company recognizes compensation cost on options granted at an exercise price less than the market value of the underlying Common Stock on the date of grant.
In August 2003, the Company issued approximately 3.9 million stock options with an exercise price of $0.05 per share while the market value of the underlying Common Stock on the date of grant was $0.15 per share. The Company recorded approximately
$0.4 million in deferred compensation, which is expensed over the vesting period of five years. The Company expensed approximately $32,000 in compensation expense during 2003 related to these options. All stock options granted by the Company prior
to August 2003 were issued with an exercise price equal to the market value of the underlying Common Stock on the date of grant. The following table illustrates, in accordance with Financial Accounting Standards Board (FASB) Statement
No. 148 Accounting for Stock-Based Compensation  an Amendment of FASB Statement No. 123, the effect on net income (loss) and income (loss) per share as if the Company



F-10



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation:



|                                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                                                                          |  | Year Ended December 31, |        
|                                                                                                                                          |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|Net income (loss), as reported                                                                                                            |  | $                       | (14,847 | ) |      | $ | (29,591 | )    |  | $ | 26,104 |  
|Add: stock based compensation expense included in reported net income (loss)                                                              |  |                         |        |   |      |   |        |      |  |   | 32     |  
|Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                         | (154    | ) |      |   | (111    | )    |  |   | (116   | )
|                                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Pro forma net income (loss)                                                                                                               |  | $                       | (15,001 | ) |      | $ | (29,702 | )    |  | $ | 26,020 |  
|                                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Basic and diluted loss per share:                                                                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income (loss), as reported                                                                                                            |  | $                       | (2.31   | ) |      | $ | (0.79   | )    |  | $ | 0.16   |  
|                                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Pro forma net income (loss)                                                                                                               |  | $                       | (2.34   | ) |      | $ | (0.80   | )    |  | $ | 0.16   |  
|                                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  



Recent Accounting
Pronouncements



In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which addresses the consolidation of variable interest entities (VIEs) by business enterprises that are the primary
beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling
financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. In December 2003, the FASB issued a revision to FIN 46, Interpretation No. 46R (FIN 46R), to clarify some
of the provisions of FIN 46, and to exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. The Company does not have interests in structures that are commonly referred to
as special-purpose entities and therefore has not adopted FIN 46R as of December 31, 2003. The Company does not expect its adoption of FIN 46R, to materially affect its financial position, results of operations or cash flows.



In April 2003, the FASB issued Statement No. 149, Amendment of FASB Statement
No. 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities
under FASB Statement No. 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and should be applied prospectively. The provisions of SFAS 149, relating to
FASB Statement No. 133 implementation issues that have been effective for fiscal quarters beginning prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The impact of adoption of SFAS 149 did not
have a material effect on the Companys financial position, results of operations or cash flows.



In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall
be effective at the beginning of



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



the first interim period beginning after June 15, 2003. The adoption of SFAS 150 had no material impact on the Companys financial position, results of
operations or cash flows as of and for the year ended December 31, 2003.



In its October 29, 2003 meeting, the FASB proposed to make the expensing of stock options mandatory beginning in 2005. The guidance regarding this change is expected to be released in 2004. Additionally, the FASB
proposed to specify the approach that companies can use in making the transition to the expensing of options, allowing companies to include previously granted unvested options in their calculations as well as the ones granted in the current year.
When the rules are finalized, the Company will evaluate the impact on its financial position, results of operations and cash flows.



In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104
clarifies existing guidance regarding revenues for contracts that contain multiple deliverables to make it consistent with Emerging Issues Task Force No. 00-21 (EITF 00-21). The adoption of SAB 104 and EITF 00-21 did not have a material impact
on the Companys financial position, results of operations or cash flows.



|2. | RESTRUCTURING
|-- | -------------



From June 2000 until July 2002, the Company was in default under (1) a bank credit agreement of $45.2 million (the Old Credit Agreement) with
its senior secured lenders, a bank group that included, among other banks, Bank of America Strategic Solutions, Inc. (BofA) and GE Capital Corporation (GECC), (collectively, the Senior Secured Lenders); (2) senior
subordinated notes and subordinated convertible notes of $15.0 million (the Senior Subordinated Notes) issued to Heller Financial, Inc. (Heller) and Midwest Mezzanine Fund II, L.P. (Midwest) (collectively, the
Senior Subordinated Lenders); and (3) subordinated notes and other subordinated indebtedness of $3.2 million issued to various sellers of dental practices to the Company (collectively, the Seller Notes).



On July 19, 2002, the Company entered into a restructuring (the 2002
Restructuring) with its Senior Secured Lenders, its Senior Subordinated Lenders and the holders of the Seller Notes regarding the debt outstanding under the Old Credit Agreement, the Senior Subordinated Notes and the Seller Notes. Pursuant to
the Restructuring, the Company:



| |  | exchanged 32,002 shares of Convertible Preferred Stock, Series A-1 (Note 7), par value $0.000001 per share (Series A-1 Stock), for approximately $3.5 million in
aggregate principal and interest of its Seller Notes;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | exchanged 179,280 shares of Series A-1 Stock for approximately $18.1 million in aggregate principal and interest of the Senior Subordinated Notes;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | amended and restated the Old Credit Agreement;
| | - | ----------------------------------------------



| |  | issued warrants to purchase 60,859 shares of Convertible Preferred Stock, Series A-2 (Note 7), par value $.000001 per share (Series A-2 Stock), for a nominal price to
the Senior Secured Lenders;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | borrowed $1.7 million from the Senior Subordinated Lenders and James M. Usdan, the Companys Chief Executive Officer at that time (collectively with the Senior Subordinated
Lenders, the New Money Lenders) and issued 15% convertible notes with an aggregate principal amount of $1.7 million (Senior Notes), which notes were initially convertible into 3,105,618 shares of Common Stock; and issued
warrants to purchase 17,974,062 shares of the Common Stock for a nominal price to the New Money Lenders.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



On May 15, 2003, the Company entered into a series of agreements to restructure certain of its
outstanding debt and equity (the 2003 Restructuring). As of May 14, 2003, the Company had $46.7 million outstanding under the Old Credit Agreement, of which $38.3 million was due the Senior Secured Lenders excluding GECC. The
Restructuring transaction consisted of the following:



| |  | The lenders under the Old Credit Agreement, excluding GECC, accepted payment of approximately $16.4 million in full satisfaction of $38.3 million in principal and $2.0 million in
fees that the Company owed the Senior Secured Lenders. The Company recorded a gain on extinguishment of debt of approximately $21.8 million in the second quarter of 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a credit agreement with GECC, as agent, (Credit Agreement), which includes a $12.5 million term loan and a $3.5 million revolving line of credit
(Note 5).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Preferred Stock and Subordinated Note Purchase Agreement (Purchase Agreement) with Sentinel Capital Partners II, L.P. (Sentinel),
GECC (as successor to Heller), Midwest and others. Pursuant to this agreement, the Company issued $7.0 million in 20% Subordinated Promissory Notes (Subordinated Notes) and issued 79,190 shares of Series B Convertible Preferred Stock,
par value $0.000001 per share, (Series B Stock). Under the terms of the Purchase Agreement, the issuance and funding of the Series B Stock and Subordinated Notes took place in two closings. In the initial closing on May 15, 2003, the
Company issued $6.7 million in Subordinated Notes for an equal amount of cash and 76,310 shares of Series B Stock for $5.7 million in cash plus the surrender of: (i) $1.9 million in principal and accrued interest due under the Senior Notes; and,
(ii) warrants to purchase approximately 17,974,062 shares of Common Stock. The Senior Notes were recorded net of a discount of $0.3 million, the remaining value was assigned to the warrants. In the subsequent closing during the third quarter of
2003, the Company issued, to key members of management and certain other individuals, the remaining 2,880 shares of Series B Stock for approximately $0.3 million in cash and the remaining $0.3 million in Subordinated Notes for an equal amount of
cash. The Series B Stock is convertible into an aggregate 165,022,853 shares of Common Stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Warrant Purchase Agreement to acquire 49,875 warrants to purchase shares of Series A-2 Stock, that had been issued in the 2002 Restructuring, for an
aggregate purchase price of approximately $0.6 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with the 2003 Restructuring, the Company entered into a management agreement with Sentinel (Sentinel Management Agreement), whereby Sentinel is to provide various strategic financial planning, advisory and
consulting services to the Company. In consideration of the services provided by Sentinel, an annual consulting fee of $275,000 is payable quarterly in advance on the last business day of each February, May, August and November. The consulting fee
increases to $300,000 annually after the date that the Companys EBITDA (as defined in the Credit Agreement) exceeds $10.0 million for the preceding twelve months. Unless earlier terminated by the parties, the Sentinel Management Agreement will
remain in effect as long as Sentinel owns stock of the Company. If, during the term of the Sentinel Management Agreement, Sentinel holds less than 50% of the shares of Company Common Stock held by Sentinel on a fully diluted basis as of May 15,
2003, the fees payable to Sentinel will be prorated based on the number of fully diluted shares of Company Common Stock held by Sentinel on such date. Pursuant to the terms of the Sentinel Management Agreement, the Company paid Sentinel
approximately $0.5 million at closing for consulting services related to the 2003 Restructuring.



In connection with the 2002 Restructuring, the Company entered into settlement agreements (Settlement Agreements) with Jack H. Castle, Jr. and
the estate of Jack H. Castle, D.D.S. Mr. Castle served as the Companys Chief Executive Officer until February 2001 and Chairman of the Board until July 1, 2001. Dr. Castle owned all of the capital stock of Castle Dental Associates of Texas,
P.C. (formerly Jack H. Castle, D.D.S., P.C.), the professional corporation that employs the affiliated dentists in the State of Texas (the Texas PC), until his death in May 2002, at which time a successor owner of the Texas PC was
appointed.



The Settlement Agreements provided for mutual
releases of any claims that either party may have had, as well as the following terms: (i) Dr. Castles estate waived the right to receive the final payment of $0.1 million due under a deferred compensation agreement; (ii) the Company paid Mr.
Castle severance of approximately $0.3 million, reimbursed him for medical insurance and forgave $45,000 of debt that Mr. Castle owed to the Company; (iii) in August 2002, Mr. Castle acquired two offices located in Corpus Christi and one office



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



located in Beaumont and the Company paid Mr. Castle an additional $54,000 of related expenses; and (iv) effective June 30, 2002, the Company terminated a
lease of a property held by Goforth, Inc., which is owned by Mr. Castle, that required payments of approximately $16,000 per month and had a remaining term of approximately five years.



In September 2002, the Company entered into an agreement with the former owner of two dental centers located in California.
Under the terms of the agreement, the Company sold the two dental centers to the former owner for $0.6 million, including $0.5 million in cash and forgiveness of approximately $0.1 million in note payable due the former owner. The proceeds were used
to repay $0.4 million in long-term debt and $0.1 million in related expenses. The Company recognized a gain of approximately $0.4 million in the third quarter of 2002, which is included in asset impairment.



|3. | LIQUIDITY
|-- | ---------



As a result of the 2002 and 2003 Restructurings, the closing of unprofitable dental offices, the increased collection of receivables and other actions
taken by the Company to improve operating results, the financial performance and prospects of the Company have improved. The Company anticipates that cash flow from operations, the existing cash balance as of December 31, 2003, and borrowing
capacity available under its revolving line of credit will provide adequate cash flows and liquidity for 2004 for the Company to operate normally and to be able to satisfy the capital expenditures, scheduled debt payments and operational budgets of
the Company for the upcoming year.



|4. | SELECTED BALANCE SHEET INFORMATION:
|-- | -----------------------------------



The details of certain balance accounts were as follows.



|                              |  |                |        |      |   |       
|----------------------------- |  | -------------- | ------ | ---- | - | ------
|                              |  | December 31,  
|                              |  | 2002           |        | 2003
|                              |  | (in thousands)
|Property and equipment:       |  |                |        |      |   |       
|Equipment                     |  | $              | 16,464 |      | $ | 16,936
|Leasehold improvements        |  |                | 9,995  |      |   | 10,239
|Furniture and fixtures        |  |                | 2,572  |      |   | 2,740 
|Vehicles                      |  |                | 177    |      |   | 177   
|                              |  |                |        |      |   |       
|Total property and equipment  |  |                | 29,208 |      |   | 30,092
|Less accumulated depreciation |  |                | 17,935 |      |   | 20,898
|                              |  |                |        |      |   |       
|Property and equipment, net   |  | $              | 11,273 |      | $ | 9,194 
|                              |  |                |        |      |   |       



Depreciation expense
was approximately $3.8 million, $3.5 million and $3.0 million for the years ended December 31, 2001, 2002 and 2003, respectively. Fully depreciated assets in use as of December 31, 2002 and 2003 were approximately $5.2 million and $9.7 million,
respectively.



|                              |  |                |        |      |   |       
|----------------------------- |  | -------------- | ------ | ---- | - | ------
|                              |  | December 31,  
|                              |  | 2002           |        | 2003
|                              |  | (in thousands)
|Intangibles:                  |  |                |        |      |   |       
|Goodwill                      |  | $              | 14,838 |      | $ | 14,838
|Other                         |  |                | 355    |      |   | 355   
|                              |  |                |        |      |   |       
|Total intangibles             |  |                | 15,193 |      |   | 15,193
|Less accumulated amortization |  |                | 293    |      |   | 347   
|                              |  |                |        |      |   |       
|Intangibles, net              |  | $              | 14,900 |      | $ | 14,846
|                              |  |                |        |      |   |       



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Amortization expense was approximately $2.8 million, $0.1 million and $0.1 million for the years
ended December 31, 2001, 2002 and 2003, respectively. As discussed in Note 1 under Intangible Assets, effective January 1, 2002, the Company adopted SFAS 142 and has reclassified approximately $54.9 million from intangible assets
to goodwill. See Note 1 for further discussion.



|                                  |  |                |       |      |   |      
|--------------------------------- |  | -------------- | ----- | ---- | - | -----
|                                  |  | December 31,  
|                                  |  | 2002           |       | 2003
|                                  |  | (in thousands)
|Accrued liabilities:              |  |                |       |      |   |      
|Due to patients                   |  | $              | 3,767 |      | $ | 4,118
|Salaries, wages and payroll taxes |  |                | 3,441 |      |   | 2,709
|Other                             |  |                | 1,291 |      |   | 1,445
|                                  |  |                |       |      |   |      
|Total accrued liabilities         |  | $              | 8,499 |      | $ | 8,272
|                                  |  |                |       |      |   |      



|5. | LONG-TERM DEBT:
|-- | ---------------



Long-term debt consisted of the following:



|                                                   |  |                |        |      |   |       
|-------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                   |  | December 31,  
|                                                   |  | 2002           |        | 2003
|                                                   |  | (in thousands)
|Credit Agreement                                   |  | $              |       |      | $ | 11,750
|Subordinated Notes                                 |  |                |       |      |   | 7,344 
|Old Credit Agreement                               |  |                | 47,228 |      |   |      
|Senior Subordinated Notes, net of discount of $357 |  |                | 1,405  |      |   |      
|Litigation settlement (Note 6)                     |  |                | 846    |      |   |      
|Other notes payable                                |  |                | 16     |      |   | 16    
|                                                   |  |                |        |      |   |       
|Total debt                                         |  |                | 49,495 |      |   | 19,110
|Less current portion                               |  |                | 2,276  |      |   | 1,510 
|                                                   |  |                |        |      |   |       
|Long-term debt                                     |  | $              | 47,219 |      | $ | 17,600
|                                                   |  |                |        |      |   |       



As discussed in Note
2, the Company entered into a Credit Agreement dated May 15, 2003, that consists of a $12.5 million term loan and $3.5 million revolving line of credit. The term loan includes $8.4 million that was owed to GECC under the Old Credit Agreement, which
was rolled into the Credit Agreement. Principal of the term loan is payable quarterly in installments of approximately $0.4 million per quarter in 2004, $0.6 million per quarter in 2005, $0.8 million per quarter in 2006 through September 30, 2007,
with a final payment of the remaining principal balance due November 15, 2007. The Company may be required to make additional principal payments, including an annual cash flow payment based on achieving certain financial targets, and other mandatory
prepayments as set forth in the Credit Agreement. Interest is payable monthly or quarterly depending on whether the Company chooses to pay interest based upon the prime rate as quoted in The Wall Street Journal (Base Rate) or LIBOR.
Interest is equal to the Base Rate plus 3.25% per annum or LIBOR plus 4.5% per annum. A closing fee of $0.1 million was payable upon initial funding under the Credit Agreement and an administrative fee of $25,000 is payable annually beginning May
15, 2004. As defined in the Credit Agreement, fees are payable for the issuance of letters of credit and for unused availability under the revolving credit facility. 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. The
Credit Agreement is collateralized by all of the assets of the Company and its subsidiaries. As of December 31, 2003, there was approximately $0.4 million outstanding under the revolving line of credit.



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



As discussed in Note 2, on May 15, 2003, the Company entered into an agreement to issue Subordinated
Notes with an aggregate principal amount of $7.0 million. Interest accrues at 20% per annum as follows: (a) 10% per annum is payable quarterly on each May 15, August 15, November 15 and February 15 (each, an Interest Payment Date); and
(b) 10% per annum (PIK Interest) quarterly on each Interest Payment Date, by adding an amount equal to the aggregate accrued but unpaid PIK Interest as of such Interest Payment Date to the principal amount of the Note. Principal is due
May 15, 2008.



The aggregate maturities of long-term debt for
each of the next five years subsequent to December 31, 2003, were as follows (in thousands):



|     |  |   |       
|---- |  | - | ------
|2004 |  | $ | 1,510 
|2005 |  |   | 2,502 
|2006 |  |   | 3,002 
|2007 |  |   | 2,252 
|2008 |  |   | 9,844 
|     |  |   |       
|     |  | $ | 19,110
|     |  |   |       



|6. | 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,
2003 (in thousands):



|                               |  |   |       
|------------------------------ |  | - | ------
|2004                           |  | $ | 4,198 
|2005                           |  |   | 3,514 
|2006                           |  |   | 2,878 
|2007                           |  |   | 1,871 
|2008                           |  |   | 1,163 
|Thereafter                     |  |   | 1,048 
|                               |  |   |       
|Total minimum lease obligation |  | $ | 14,672
|                               |  |   |       



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.



Litigation



On May 30, 2002, litigation was filed in the Circuit Court for Putnam
County, Tennessee against the Company and one of its subsidiaries by the spouse and children of a patient of an affiliated dental practice alleging that the defendants were negligent and vicariously liable in the care and treatment of the patient,
resulting in his death. The Company filed a response to the litigation denying liability in this matter. The matter was settled in October 2003, within the Companys insurance policy limits. On February 9, 2004, Mr. Herrens daughter filed
suit in the Circuit Court for Putnam County, Tennessee, seeking an injunction or restraining order preventing the disbursement of funds from the settlement, and seeking to amend the settlement to reflect that the plaintiff receive her proper share
of the settlement, or alternatively, to set the settlement aside and reinstate the original lawsuit. The Company has filed a response to the lawsuit denying any liability in this matter and intends to vigorously defend itself.



In June 2000, the Company recorded litigation expenses of $1.5 million
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 $1.1 million, plus interest at 10 percent from the date that the judgment was filed. In connection with the restructuring of certain indebtedness in July 2002, the



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Company entered into a forbearance agreement with the plaintiffs regarding this judgment. The Company agreed to make the following payments in exchange for
forbearance in enforcing the judgment (1) $100,000 interest payment paid in July 2002, (2) twenty-three monthly installments of $30,000 each beginning August 2002 and (3) then $25,000 monthly installments until paid in full. Pursuant to an Amendment
to the forbearance agreement, dated as of May 15, 2003, the plaintiffs consented to GECC filing liens against the Companys assets to secure its obligations under the Credit Agreement and the Company agreed to increase by $5,000 per month the
amounts being paid on the forbearance agreement. The Company entered into a Pay-Off Agreement on November 4, 2003, and made one final payment of approximately $0.5 million in full satisfaction of the outstanding judgment. Pursuant to the Pay-Off
Agreement the Company has been released from all claims under the judgment.



In May 2003, the Company was notified that its former malpractice insurance provider had filed for liquidation and that payment of claims and legal defense in various malpractice lawsuits filed against the Company and
its affiliated dental practices had been terminated. The insolvent insurance company provided malpractice coverage for the Company and its affiliated dental practices in 2000 and 2001. Therefore the Company is potentially liable for payment of any
claims, judgments or other costs associated with these lawsuits. Management has reviewed all open claims and lawsuits still pending that this insurance company was covering and does not believe that the potential liability, if any, will have a
material impact on the Companys financial results.



The
Company has been informed of an investigation by Texas Medicaid concerning alleged overpayments for services for certain procedures performed by the Companys affiliated dental practice in Texas. Texas Medicaid has alleged that certain
advertised specials were not offered to Medicaid patients from 1997 through 2001. Texas Medicaid has preliminarily claimed overpayments of approximately $280,000. The Company disputes Texas Medicaids claims and intends to vigorously contest
the findings of the Texas Medicaid investigative offices.



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.



|7. | STOCK
|-- | -----



Stock Price



In January 2003, at the Companys Annual Meeting of Stockholders, the stockholders approved to amend the Companys Certificate of Incorporation
in order to reduce the par value of the Companys common stock and preferred stock from $0.001 per share to $0.000001 per share.



Purchase of common stock



During 2003 the Company acquired approximately 90,000 shares of Company Common Stock owned by its former President and Chief Executive Officer for
approximately $12,000. In addition, the Company acquired 883,243 shares of Company Common Stock from funds managed by a former director for approximately $0.1 million. These shares were cancelled. (See Note 14).



Preferred Stock



The Company has authorized 1,000,000 shares of preferred stock. The Company
had 211,282 and 195,838 shares of Series A-1 Stock outstanding at December 31, 2002 and 2003, respectively. In addition, the Company had issued 60,859 and 10,984 warrants to purchase Series A-2 Stock at December 31, 2002 and 2003, respectively. Each
share of Series A-1 Stock is convertible into approximately 182.7 shares of Common stock (an aggregate of 35.8 million shares of Common Stock at December 31, 2003). The Series A-1 Stock has customary anti-dilution protection with regard to such
events as stock splits and stock dividends. Upon liquidation, a holder of a share of Series A-1 Stock is entitled to a preferential distribution in liquidation equal to $100 per share. The Series A-2 Stock issuable upon exercise of the outstanding
warrants has a liquidation preference equal to $47.34 per share, for an aggregate liquidation preference of $0.5 million.



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In connection with the 2003 Restructuring, the Company issued an aggregate 79,190 shares of Series B
Stock. Each share of the Series B Stock is convertible into 2,083.89 shares of Common Stock (an aggregate of 165.0 million shares of Common Stock at December 31, 2003). Upon liquidation, a holder of a share of Series B Stock is entitled to a
preferential distribution in liquidation equal to $100 per share plus 15% per annum from the date of issue.



The aggregate shares of Series A-1 Stock, warrants to purchase Series A-2 Stock and shares of Series B Stock were convertible into approximately 202.8
million shares of Common Stock as of December 31, 2003 and, once issued, votes on an as converted basis on all matters submitted to the holders of Common Stock of the Company. Holders of Series A-1 Stock and Series B Stock are entitled
to elect a majority of the directors of the Company. Sentinel owns more than 50% of the voting stock of the Company and therefore is the controlling stockholder of the Company.



|8. | INCOME TAXES
|-- | ------------



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



|                                      |  |                |         |   |      |   |         |  
|------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                      |  | December 31,   |        
|                                      |  | 2002           |         |   | 2003 |  
|                                      |  | (in thousands) |        
|Deferred tax assets:                  |  |                |         |   |      |   |         |  
|Intangibles                           |  | $              | 10,979  |   |      | $ | 9,375   |  
|Net operating loss carryforward       |  |                | 9,644   |   |      |   | 7,150   |  
|Allowance for bad debts               |  |                | 6,011   |   |      |   | 1,257   |  
|Property and equipment                |  |                | 39      |   |      |   | 569     |  
|Other                                 |  |                | 361     |   |      |   | 121     |  
|                                      |  |                |         |   |      |   |         |  
|Total deferred assets                 |  |                | 27,034  |   |      |   | 18,472  |  
|Less valuation allowance              |  |                | (25,393 | ) |      |   | (12,854 | )
|                                      |  |                |         |   |      |   |         |  
|                                      |  |                | 1,641   |   |      |   | 5,618   |  
|                                      |  |                |         |   |      |   |         |  
|Deferred tax liabilities:             |  |                |         |   |      |   |         |  
|Unbilled receivables                  |  |                | (1,007  | ) |      |   | (915    | )
|Other                                 |  |                | (634    | ) |      |   | (141    | )
|                                      |  |                |         |   |      |   |         |  
|                                      |  |                | (1,641  | ) |      |   | (1,056  | )
|                                      |  |                |         |   |      |   |         |  
|Net deferred tax assets (liabilities) |  |                |        |   |      |   | 4,562   |  
|                                      |  |                |         |   |      |   |         |  



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



|                                  |  |                         |   |      |   |      |      |  |   |        |  
|--------------------------------- |  | ----------------------- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                  |  | Year Ended December 31, |  
|                                  |  | 2001                    |   | 2002 |   |      | 2003 | 
|                                  |  | (in thousands)          |  
|Current tax provision (benefit):  |  |                         |   |      |   |      |      |  |   |        |  
|Federal                           |  | $                       |  |      | $ | (161 | )    |  | $ | 358    |  
|State                             |  |                         |  |      |   |     |      |  |   | 42     |  
|                                  |  |                         |   |      |   |      |      |  |   |        |  
|Total current                     |  |                         |  |      |   | (161 | )    |  |   | 400    |  
|                                  |  |                         |   |      |   |      |      |  |   |        |  
|Deferred tax provision (benefit): |  |                         |   |      |   |      |      |  |   |        |  
|Federal                           |  |                         |  |      |   |     |      |  |   | (4,082 | )
|State                             |  |                         |  |      |   |     |      |  |   | (480   | )
|                                  |  |                         |   |      |   |      |      |  |   |        |  
|Total deferred                    |  |                         |  |      |   |     |      |  |   | (4,562 | )
|                                  |  |                         |   |      |   |      |      |  |   |        |  
|Benefit for income taxes          |  | $                       |  |      | $ | (161 | )    |  | $ | (4,162 | )
|                                  |  |                         |   |      |   |      |      |  |   |        |  



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                                      |  |                         |        |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | Year Ended December 31, |       
|                                                      |  | 2001                    |        |   | 2002 |   |         | 2003 | 
|                                                      |  | (in thousands)          |       
|Tax at U.S. statutory rate (34%)                      |  | $                       | (5,048 | ) |      | $ | (10,061 | )    |  | $ | 7,460   |  
|State income taxes, net of federal tax                |  |                         | (594   | ) |      |   | (1,184  | )    |  |   | 879     |  
|Nondeductible expenses and other                      |  |                         | 47     |   |      |   | 32      |      |  |   | 38      |  
|Change in estimate of net operating loss carryforward |  |                         | (3,329 | ) |      |   | 711     |      |  |   |        |  
|Valuation allowance                                   |  |                         | 8,924  |   |      |   | 10,502  |      |  |   | (12,539 | )
|Federal income tax carryback refund                   |  |                         |       |   |      |   | (161    | )    |  |   |        |  
|                                                      |  |                         |        |   |      |   |         |      |  |   |         |  
|Provision (benefit) for income taxes                  |  | $                       |       |   |      | $ | (161    | )    |  | $ | (4,162  | )
|                                                      |  |                         |        |   |      |   |         |      |  |   |         |  



The preparation of
consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax provisions. The Company
evaluates the recoverability of its deferred tax assets on an ongoing basis. In making this evaluation the Company considers all available positive and negative evidence, to determine whether, based on such evidence, it is more likely than not that
some portion or all of the net deferred tax assets will be realized in future periods. This evaluation requires significant judgment. In addition, the Company has made significant estimates involving current and deferred income taxes, tax attributes
relating to the interpretation of various tax laws, historical bases of tax attributes associated with certain tangible and intangible assets and limitations surrounding the future realization of the deferred tax assets.



Based on the Companys operating results in prior years, the Company had
established a valuation allowance against its net deferred tax asset as it was deemed more likely than not that the net deferred tax assets would not be realized. During the fourth quarter of 2003, the Company determined, based on the 2003
Restructuring of debt, operating results for the period subsequent to the 2003 Restructuring and anticipated operating income and cash flows for future periods that it is more likely than not that certain deferred tax assets will be realized in the
future and accordingly, it was appropriate to release the valuation allowance recorded against those deferred tax asset.



The Company believes that it is more likely than not that the net deferred tax asset of $4.6 million will be recovered through reductions in tax
liabilities in future periods. However, recovery is dependent on achieving its forecast of future operating income over a period of time. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis.
Failure to achieve its operating income targets may change the assessment regarding the recoverability of the net deferred tax assets and such change could result in an allowance being recorded against some or all of the net deferred tax assets. Any
increase in a valuation allowance would result in additional income tax expense, lower stockholders equity and could have a significant impact on net in future periods.



The Company has excluded for federal income tax purposes, the $21.8 million gain recognized upon the forgiveness of certain
indebtedness in May 2003, as the Company met insolvency conditions at the time of the forgiveness, pursuant to the federal income tax code. The tax code additionally requires that the Company reduce certain tax attributes to the extent that the
forgiveness of indebtedness has met the insolvency conditions. Accordingly, the Company reduced net operating loss carryforwards. These tax attributes had been fully reserved prior to the debt forgiveness resulting in the Company recording a
corresponding reduction in the related deferred tax asset valuation allowance. Additionally, as a result of the 2003 Restructuring, the Company incurred an ownership change under section 382 of the Internal Revenue Code that will substantially limit
the ability of the Company to utilize any of their remaining net operating losses and therefore the net operating losses have been fully valued against.



F-19



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|9. | 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 2002 Stock Option Plan (the 2002 Plan, and together with the Employees Plan, 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 in Note 1.



Under the
Employees Plan, the Company was 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 2002 Plan, the Company is authorized to
issue 37,403,715 shares of Common Stock pursuant to Awards granted to officers and key employees in the form of stock options. After the Company adopted the 2002 Plan, no further awards will be granted under the Employees Plan.



There are 342,900 options granted under the Employees
Plan and approximately 7.3 million options granted under the 2002 Plan at December 31, 2003. The Compensation Committee administers the Plans. These stock options have contractual terms of 10 years. 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, 2003 and the changes during the three-year period then ended.



|                                                                |  |                                      |            |   |                               |   |     
|--------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ----------------------------- | - | ----
|                                                                |  | Number of Sharesof UnderlyingOptions |            |   | WeightedAverageExercise Price
|Granted                                                         |  |                                      | 400,000    |   |                               | $ | 0.21
|Exercised                                                       |  |                                      |           |   |                               |   |    
|Forfeited                                                       |  |                                      | (238,725   | ) |                               |   | 6.97
|Expired                                                         |  |                                      | (302,775   | ) |                               |   | 7.24
|                                                                |  |                                      |            |   |                               |   |     
|Outstanding at December 31, 2001                                |  |                                      | 888,900    |   |                               | $ | 4.22
|                                                                |  |                                      |            |   |                               |   |     
|Exercisable at December 31, 2001                                |  |                                      | 407,839    |   |                               | $ | 7.77
|                                                                |  |                                      |            |   |                               |   |     
|Granted                                                         |  |                                      |           |   |                               | $ |    
|Exercised                                                       |  |                                      |           |   |                               |   |    
|Forfeited                                                       |  |                                      | (162,350   | ) |                               |   | 8.47
|Expired                                                         |  |                                      | (36,650    | ) |                               |   | 3.83
|                                                                |  |                                      |            |   |                               |   |     
|Outstanding at December 31, 2002                                |  |                                      | 689,900    |   |                               | $ | 2.72
|                                                                |  |                                      |            |   |                               |   |     
|Exercisable at December 31, 2002                                |  |                                      | 382,300    |   |                               | $ | 4.47
|                                                                |  |                                      |            |   |                               |   |     
|Granted                                                         |  |                                      | 9,865,427  |   |                               | $ | 0.08
|Exercised                                                       |  |                                      |           |   |                               |   |    
|Forfeited                                                       |  |                                      | (2,847,000 | ) |                               |   | 0.16
|Expired                                                         |  |                                      |           |   |                               |   |    
|                                                                |  |                                      |            |   |                               |   |     
|Outstanding at December 31, 2003                                |  |                                      | 7,708,327  |   |                               | $ | 0.29
|                                                                |  |                                      |            |   |                               |   |     
|Exercisable at December 31, 2003                                |  |                                      | 1,234,650  |   |                               | $ | 0.43
|                                                                |  |                                      |            |   |                               |   |     
|Weighted-average fair value of options granted during the year: |  |                                      |            |   |                               |   |     
|2001                                                            |  | $                                    | 0.17       |   |                               |   |     
|2002                                                            |  |                                      |           |   |                               |   |     
|2003                                                            |  |                                      | 0.11       |   |                               |   |     



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



For purposes of the pro forma disclosures in Note 1, under Accounting For Stock-Based
Compensation, the fair value of each stock option granted by the Company was 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 83.9% for 2001, 63.5% for 2002, and 91.7% for 2003; risk-free interest rates are 5.4% for 2001, 3.8% for 2002, and 3.3% for 2003; and the expected lives of the options average eight years for 2001, seven years for 2002 and six
years for 2003.



The following table summarizes information
about stock options outstanding at December 31, 2003:



|                        |  |                                      |  |                              |  |                              |       |                             |           |                              |   |      
|----------------------- |  | ------------------------------------ |  | ---------------------------- |  | ---------------------------- | ----- | --------------------------- | --------- | ---------------------------- | - | -----
|                        |  | Options Outstanding                  |  | Options Exercisable         
|Range of Exercise Price |  | WeightedNumberOutstandingat 12/31/03 |  | AverageRemainingContractLife |  | WeightedAverageExercisePrice |       | NumberExercisableat12/31/03 |           | WeightedAverageExercisePrice
|$0.00 to $1.99          |  | 7,440,427                            |  | 8.50                         |  | $                            | 0.07  |                             | 973,000   |                              | $ | 0.11 
|$2.00 to $7.99          |  | 163,400                              |  | 6.51                         |  | $                            | 3.73  |                             | 157,150   |                              | $ | 3.76 
|$8.00 to $10.00         |  | 104,500                              |  | 4.56                         |  | $                            | 10.00 |                             | 104,500   |                              | $ | 10.00
|                        |  |                                      |  |                              |  |                              |       |                             |           |                              |   |      
|                        |  | 7,708,327                            |  | 8.40                         |  | $                            | 0.28  |                             | 1,234,650 |                              | $ | 1.41 
|                        |  |                                      |  |                              |  |                              |       |                             |           |                              |   |      



|10. | EARNINGS PER SHARE:
|--- | -------------------



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



|                            |  |                |  |        |  |        
|--------------------------- |  | -------------- |  | ------ |  | -------
|                            |  | December 31,  
|                            |  | 2001           |  | 2002   |  | 2003   
|                            |  | (in thousands)
|Shares                      |  |                |  |        |  |        
|Shares - common             |  | 6,417          |  | 6,417  |  | 6,493  
|Convertible preferred stock |  |               |  | 17,554 |  | 140,403
|Warrants                    |  |               |  | 13,231 |  | 12,182 
|                            |  |                |  |        |  |        
|Shares - basic              |  | 6,417          |  | 37,202 |  | 159,078
|Options                     |  |               |  |       |  | 3,481  
|                            |  |                |  |        |  |        
|Shares - diluted            |  | 6,417          |  | 37,202 |  | 162,559
|                            |  |                |  |        |  |        



Options to purchase an
aggregate of 888,900 and 689,900 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 and 2002, respectively, because their effect would have been antidilutive.
Options to purchase an aggregate of 267,900 shares of common stock at exercise prices of $2.31 to $10.00 per share were excluded from the calculation of diluted income per share for 2003, as the exercise price was greater than the average fair
market value during the year.



|11. | 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 2001 or 2003. Company contributions for the year ended December 31, 2002 were approximately $0.1 million.



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|12. | SUPPLEMENTAL CASH FLOW INFORMATION:
|--- | -----------------------------------



|                                                                                                                                            |  |                |       |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | December 31,   |      
|                                                                                                                                            |  | 2001           |       | 2002 |   |        | 2003 | 
|                                                                                                                                            |  | (in thousands) |      
|Cash paid during the period for:                                                                                                            |  |                |       |      |   |        |      |  |   |        |  
|Interest                                                                                                                                    |  | $              | 4,909 |      | $ | 4,065  |      |  | $ | 1,780  |  
|Income taxes                                                                                                                                |  |                |      |      |   |       |      |  |   |       |  
|Supplemental disclosure of noncash investing and financing activities:                                                                      |  |                |       |      |   |        |      |  |   |        |  
|Issuance of long-term obligation for debt issuance cost                                                                                     |  |                |      |      |   | 1,897  |      |  |   |       |  
|Issuance of warrants in exchange for long-term debt obligations                                                                             |  |                |      |      |   | 680    |      |  |   |       |  
|Forgiveness of long-term debt obligations plus accrued interest and fees                                                                    |  |                |      |      |   | 22,004 |      |  |   | 23,930 |  
|Write-off of debt issuance cost                                                                                                             |  |                |      |      |   | (422   | )    |  |   | (2,074 | )
|Issuance of preferred stock in exchange for long-term debt obligations                                                                      |  |                |      |      |   | 4,000  |      |  |   | 1,615  |  
|Reclassification of accrued certain litigation and interest expense to long-term debt obligations in connection with the 2002
Restructuring |  |                |      |      |   | 3,306  |      |  |   |       |  
|Change in par value of common stock                                                                                                         |  |                |      |      |   |       |      |  |   | 6      |  
|Acquisition of property and equipment with note payable                                                                                     |  |                | 25    |      |   |       |      |  |   | 10     |  



|13. | 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. 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, and the accounts payable 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, 2002 and 2003, respectively, approximate their fair
value based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.



Interest Rate Swaps



SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, 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 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%.



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



For 2000, the weighted-average variable rates were subject to change over time as LIBOR fluctuates. During 2000, the Company was required to make $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.



|14. | RELATED PARTY TRANSACTIONS:
|--- | ---------------------------



In connection with the 2003 Restructuring, the Company issued $6.5 million in 20% Subordinated Notes and 63,408 shares of Series B Stock to Sentinel.
Accordingly, Sentinel became the majority shareholder of the Company. Pursuant to the terms of the Sentinel Management Agreement the Company paid Sentinel approximately $0.2 million in fees during 2003. In addition, the Company paid Sentinel $0.5
million in connection with the 2003 Restructuring for consulting services related to the restructuring of the Companys debt.



In connection with the 2003 Restructuring, the Company issued approximately $0.3 million in 20% Subordinated Notes and 2,880 shares of Series B Stock to
the certain members of the Companys board of directors, executives and other key members of management.



Pursuant to the 2002 Restructuring, Heller received 119,520 shares of Series A-1 Stock in exchange for $12.0 million in aggregate principal and interest
of Senior Subordinated Notes and Midwest received 59,760 shares of Series A-1 Stock in exchange for $6.0 million in principal and interest of Senior Subordinated Notes. In 2003, Hellers shares were assigned to GECC. In addition in 2002, Heller
and Midwest each loaned $0.5 million to the Company in exchange for $0.5 million in Senior Subordinated Notes convertible into 913,417 shares of Common Stock and warrants to purchase 5,286,489 shares of Common Stock. Mr. James Usdan, the
Companys President and Chief Executive Officer until June 2003, loaned $0.7 million to the Company in exchange for $0.7 million in aggregate principal amount of Senior Subordinated Notes convertible into 1,278,784 shares of Common Stock and a
warrant to purchase 7,401,084 shares of Common Stock. In connection with the 2003 Restructuring, GECC (as successor to Heller) and Midwest each received 5,644 shares of Series B Stock and Mr. Usdan received 7,902 shares of Series B Stock in exchange
for an aggregate $1.9 million in principal and accrued interest due under the Senior Notes. GECC and Midwest are significant shareholders of the Company.



On May 15, 2003, the Company entered into a five-year employment agreement with Mr. Usdan, replacing the employment agreement with Mr. Usdan entered into
on July 19, 2002. The employment agreement provided for a base annual salary of $375,000. Mr. Usdan was eligible for an annual bonus determined by the Compensation Committee based upon the achievement of performance objectives to be established by
the Compensation Committee. On June 13, 2003, the Company entered into a General Release and Severance Agreement (Severance Agreement) with Mr. Usdan whereby the Company agreed to pay him the following amounts owed under his employment
agreement: (a) $18,000 for two and one-half weeks accrued but unused vacation; (b) a $30,000 bonus earned in connection with the Restructuring; (c) $53,250 in earned deferred salary from 2002; and (d) for up to $5,000 in expenses for which he was
entitled to reimbursement. In addition, the Company agreed from June 14, 2003 through June 13, 2004 to pay Mr. Usdan as severance payments $31,250.00 per month. If the Company elects to extend the term of his non-compete covenant, the Company must
pay Mr. Usdan $31,250.00 per month from June 14, 2004 through June 13, 2005.



Pursuant to the Severance Agreement, Mr. Usdan agreed to waive all claims he might have against the Company and he surrendered all stock options previously granted to him. He also agreed to the termination of all of
his rights under his Employment Agreement, the Purchase Agreement, the Stockholders Agreement and the Registration Rights Agreement. Pursuant to a separate Securities Purchase Agreement executed on June 13, 2003: (a) Mr. Usdan sold to Sentinel 8,022
shares of Series B Stock and $14,000 in 20% Subordinated Notes for an aggregate purchase price of $726,000 in cash; and (b) Mr. Usdan sold to the Company 90,000 shares of Common Stock for a purchase price of $11,780 in cash.



In connection with the 2003 Restructuring, the Company entered into the
Credit Agreement with GECC, which includes a $12.5 million term loan and $3.5 million revolving line of credit (Note 4).



F-23



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Mr. Cresci, a former director of the Company, is a Managing Director of Pecks Management Partners
Ltd., the investment advisor to the Pecks Investors. Mr. Cresci was nominated as a director of the Company pursuant to the provisions of a Stockholders Agreement between the Company, Pecks Management Partners Ltd. and certain members of Jack H.
Castle, Jr.s family. This Stockholders Agreement was terminated in connection with the 2002 Restructuring. Effective September 30, 2003, the Company purchased 883,243 shares of Common Stock from funds managed by Pecks Management Partners, Ltd.
for approximately $0.1 million. The stock was subsequently canceled.



In connection with the 2002 Restructuring, the Company entered into a Settlement Agreement with Jack H. Castle, Jr. and the estate of Jack H. Castle, D.D.S. Mr. Castle served as the Companys Chief Executive Officer until February 2001
and continued as the Companys Chairman of the Board until July 1, 2001. Dr. Castle owned all of the capital stock of Castle Dental Associates of Texas, P.C. (formerly Jack H. Castle, D.D.S., P.C.), the professional corporation that employs all
of the affiliated dentists in the State of Texas (the Texas PC), until his death in May 2002.



In December 1995, the Company acquired all of the stock of Jack H. Castle, D.D.S., Inc., a professional corporation of which Dr. Castle, was the sole
owner. In connection with that transaction, the Company paid Dr. Castle $6.0 million in cash and entered into a Deferred Compensation Agreement with Dr. Castle pursuant to which the Company agreed to pay Dr. Castle $2.6 million in 20 quarterly
installments of $131,500 beginning March 1996 and ending in December 2000. Prior to entering into the Settlement Agreements, the Company owed Dr. Castle one additional payment of $131,500, which is included in deferred compensation payable, related
party at December 31, 2001. Pursuant to the Settlement Agreements, Dr. Castles estate waived the right to receive the $131,500 payment due under the deferred compensation agreement.



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 the Texas PC. Pursuant to the Management Services Agreement, Dr. Castle, as sole shareholder of the Texas PC, received an annual payment of $100,000 for services performed in connection therewith. Upon the death of Dr.
Castle, the Company exercised its right to designate the licensed dentist who owns the Texas PCs capital stock and amended the management services agreement to eliminate the $100,000 annual payment.



In March 2002, the Company terminated a lease (the Lease) of a
property held by Goforth, Inc., which is owned by Mr. Castle. The Lease required payments of approximately $16,000 per month and had a remaining term of approximately five years. Goforth also submitted a claim to the Company for reimbursement of
$228,594 in build-out expenses relating to the property underlying the Lease. In connection with the Settlement Agreement, Mr. Castle, on behalf of his affiliates, including Goforth, released the Company from any and all claims, including
obligations under the Lease, and the Company agreed to pay all rent on the Lease through June 30, 2002. The Company paid $197,000 and $33,000 under the terms of the lease agreement during 2001 and 2002, respectively.



In addition to the provisions discussed above, the Settlement Agreements
provide for the following:



| |  | Dr. Castles estate and Mr. Castle both agreed that the trademarks Castle Dental Centers, Castle Dental and Jack H. Castle, D.D.S., P.C.
belong to the Company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Mr. Castle was paid severance of $21,147 per month from July 1, 2001 through June 30, 2002;
| | - | -------------------------------------------------------------------------------------------



| |  | Mr. Castle was reimbursed for medical insurance through June 30, 2002;
| | - | ----------------------------------------------------------------------



| |  | Mr. Castles $45,000 debt to the Company was forgiven;
| | - | ------------------------------------------------------



| |  | Mr. Castle was reimbursed for certain out-of-pocket expenses and transferred his home computer;
| | - | -----------------------------------------------------------------------------------------------



| |  | Companies owned by Mr. Castle acquired two offices located in Corpus Christi and one office located in Beaumont;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Upon the transfer of the Corpus/Beaumont assets, Mr. Castle was paid an additional severance payment of $24,000;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Upon the transfer of the Corpus/Beaumont assets, Mr. Castle was paid $30,000 to cover the costs of hiring a replacement dentist in Beaumont;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | Mr. Castle agreed not to compete with the Company through September 30, 2002; and
| | - | ---------------------------------------------------------------------------------



| |  | Mr. Castle agreed not to solicit the Companys employees for three years.
| | - | -------------------------------------------------------------------------



F-24



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In February 2001, the Company engaged Getzler & Co., Inc. as a management consultant to assist in
the restructuring of the Company. In connection with this consulting agreement, Ira Glazer, a Managing Director of Getzler & Co., served as acting Chief Executive Officer of the Company from February 2001 until June 2001. The Company paid
Getzler & Co. $777,000 in fees, $400,000 of which were for the services of Mr. Glazer, for its consulting services. In addition, the Company granted options to purchase 75,000 shares of Common Stock to Getzler & Co. Mr. Glazer is entitled to
50% of such options. Mr. Glazer is a member of the Companys board of directors.



|15. | ASSET IMPAIRMENT AND RESTRUCTURING CHARGES AND OTHER CHARGES:
|--- | -------------------------------------------------------------



As discussed in Note 2, the Company restructured certain of its debt and equity in July 2002 and May 2003. The Company began the restructuring process in
2001. The Company recorded the following costs in 2001, 2002 and 2003 related to the these restructurings. The Company has recognized and accounted for these costs in accordance with the provisions of Emerging Issues Task Force Consensus No. 94-3
Accounting for Restructuring Costs and SFAS 146.



|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|------------------------------- |  | ----------------------------------- | ----- | ---------------------------- | - | --------------- |  | --------------------------- | ----- |  | - | ---
|                                |  | Restructuringand OtherCosts in 2001 |       | Paymentsto SettleObligations |   | AssetWrite-down |  | Balance atDecember 31, 2001
|Asset impairment                |  | $                                   | 2,929 |                              | $ |                |  | $                           | 2,929 |  | $ |   
|Legal and professional services |  |                                     | 1,495 |                              |   | 1,279           |  |                             |      |  |   | 216
|Severance costs                 |  |                                     | 450   |                              |   | 279             |  |                             |      |  |   | 171
|Dental center closures          |  |                                     | 384   |                              |   | 11              |  |                             |      |  |   | 373
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|Total                           |  | $                                   | 5,258 |                              | $ | 1,569           |  | $                           | 2,929 |  | $ | 760
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|                                |  |                                     |       |                             
|                                |  | Restructuringand OtherCosts in 2002 |       | Paymentsto SettleObligations |   | AssetWrite-down |  | Balance atDecember 31, 2002
|Asset impairment                |  | $                                   | 3,356 |                              | $ |                |  | $                           | 3,356 |  | $ |   
|Legal and professional services |  |                                     | 2,868 |                              |   | 2,943           |  |                             |       |  |   | 141
|Severance costs                 |  |                                     | 992   |                              |   | 568             |  |                             |      |  |   | 595
|Dental center closures          |  |                                     | 396   |                              |   | 510             |  |                             |      |  |   | 259
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|Total                           |  | $                                   | 7,612 |                              | $ | 4,021           |  | $                           | 3,356 |  | $ | 995
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|                                |  |                                     |       |                             
|                                |  | Restructuringand OtherCosts in 2003 |       | Paymentsto SettleObligations |   | AssetWrite-down |  | Balance atDecember 31, 2003
|Asset impairment                |  | $                                   |      |                              | $ |                |  | $                           |      |  | $ |   
|Legal and professional services |  |                                     | 835   |                              |   | 897             |  |                             |       |  |   | 79 
|Severance costs                 |  |                                     |      |                              |   | 580             |  |                             |      |  |   | 15 
|Dental center closures          |  |                                     |      |                              |   | 153             |  |                             |      |  |   | 106
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    
|Total                           |  | $                                   | 835   |                              | $ | 1,630           |  | $                           |      |  | $ | 200
|                                |  |                                     |       |                              |   |                 |  |                             |       |  |   |    



F-25



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|16. | QUARTERLY FINANCIAL DATA (UNAUDITED):
|--- | -------------------------------------



|                                                                             |  |                                       |        |   |        |   |         |       |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------ | - | ------- | ----- |  | - | ------ | - |  | - | ------ | -
|                                                                             |  | First                                 |        |   | Second |   |         | Third |  |   | Fourth |  
|                                                                             |  | (in thousands, except per share data) |       
|2002                                                                         |  |                                       |        |   |        |   |         |       |  |   |        |   |  |   |        |  
|Net patient revenues                                                         |  | $                                     | 25,488 |   |        | $ | 25,146  |       |  | $ | 25,934 |   |  | $ | 24,298 |  
|Operating income (loss)                                                      |  |                                       | 173    |   |        |   | 66      |       |  |   | (2,709 | ) |  |   | (2,022 | )
|Net income (loss) before cumulative effect of change in accounting principle |  |                                       | (1,442 | ) |        |   | (1,399  | )     |  |   | 13,420 |   |  |   | (3,170 | )
|Cumulative effect of change in accounting principle                          |  |                                       |       |   |        |   | (37,000 | )     |  |   |       |   |  |   |       |  
|Net income (loss)                                                            |  |                                       | (1,442 | ) |        |   | (38,399 | )     |  |   | 13,420 |   |  |   | (3,170 | )
|Basic and diluted earnings per share(1)                                      |  |                                       |        |   |        |   |         |       |  |   |        |   |  |   |        |  
|Net income (loss) before cumulative effect of change in accounting principle |  | $                                     | (0.22  | ) |        | $ | (0.22   | )     |  | $ | 0.22   |   |  | $ | (0.04  | )
|Cumulative effect of change in accounting principle                          |  |                                       |       |   |        |   | (5.77   | )     |  |   |       |   |  |   |       |  
|                                                                             |  |                                       |        |   |        |   |         |       |  |   |        |   |  |   |        |  
|Net income (loss)                                                            |  | $                                     | (0.22  | ) |        | $ | (5.99   | )     |  | $ | 0.22   |   |  | $ | (0.04  | )
|                                                                             |  |                                       |        |   |        |   |         |       |  |   |        |   |  |   |        |  



|                                                                      |  |                                       |        |        |   |        |  |        |        |  |   |       
|--------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------ | - | ------ |  | ------ | ------ |  | - | ------
|                                                                      |  | First                                 |        | Second |   | Third  |  | Fourth
|                                                                      |  | (in thousands, except per share data)
|2003                                                                  |  |                                       |        |        |   |        |  |        |        |  |   |       
|Net patient revenues                                                  |  | $                                     | 24,474 |        | $ | 24,065 |  | $      | 23,270 |  | $ | 22,080
|Operating income                                                      |  |                                       | 1,846  |        |   | 322    |  |        | 686    |  |   | 490   
|Net income before cumulative effect of change in accounting principle |  |                                       | 462    |        |   | 21,527 |  |        | 43     |  |   | 4,072 
|Cumulative effect of change in accounting principle                   |  |                                       |       |        |   |       |  |        |       |  |   |      
|Net income                                                            |  |                                       | 462    |        |   | 21,527 |  |        | 43     |  |   | 4,072 
|Basic and diluted earnings per share(1)                               |  |                                       |        |        |   |        |  |        |        |  |   |       
|Net income before cumulative effect of change in accounting principle |  | $                                     | 0.01   |        | $ | 0.15   |  | $      | 0.00   |  | $ | 0.02  
|Cumulative effect of change in accounting principle                   |  |                                       | 0.00   |        |   | 0.00   |  |        | 0.00   |  |   | 0.00  
|                                                                      |  |                                       |        |        |   |        |  |        |        |  |   |       
|Net income                                                            |  | $                                     | 0.01   |        | $ | 0.15   |  | $      | 0.00   |  | $ | 0.02  
|                                                                      |  |                                       |        |        |   |        |  |        |        |  |   |       



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



F-26



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|17. | 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, 2001, 2002 and 2003 is as follows:



|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                  |  | Year Ended December 31, |        
|                                                                                                                  |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|                                                                                                                  |  | (in thousands)          |        
|Net patient revenues:                                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Texas                                                                                                             |  | $                       | 66,201  |   |      | $ | 66,322  |      |  | $ | 60,769  |  
|Florida                                                                                                           |  |                         | 11,092  |   |      |   | 11,631  |      |  |   | 11,470  |  
|Tennessee                                                                                                         |  |                         | 11,017  |   |      |   | 11,686  |      |  |   | 11,011  |  
|California                                                                                                        |  |                         | 9,614   |   |      |   | 11,227  |      |  |   | 10,639  |  
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Total net patient revenues                                                                                        |  | $                       | 97,924  |   |      | $ | 100,866 |      |  | $ | 93,889  |  
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating expenses:                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Texas                                                                                                             |  | $                       | 62,088  |   |      | $ | 61,252  |      |  | $ | 53,968  |  
|Florida                                                                                                           |  |                         | 13,034  |   |      |   | 11,605  |      |  |   | 10,285  |  
|Tennessee                                                                                                         |  |                         | 10,372  |   |      |   | 10,069  |      |  |   | 9,572   |  
|California                                                                                                        |  |                         | 8,915   |   |      |   | 11,019  |      |  |   | 8,969   |  
|Corporate, general and administrative expenses                                                                    |  |                         | 7,891   |   |      |   | 7,157   |      |  |   | 6,916   |  
|Restructuring costs and other charges                                                                             |  |                         | 2,329   |   |      |   | 4,256   |      |  |   | 835     |  
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                                                          |  | $                       | 104,629 |   |      | $ | 105,358 |      |  | $ | 90,545  |  
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating income (loss):                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Texas                                                                                                             |  |                         | 4,113   |   |      |   | 5,070   |      |  |   | 6,801   |  
|Florida                                                                                                           |  |                         | (1,942  | ) |      |   | 26      |      |  |   | 1,185   |  
|Tennessee                                                                                                         |  |                         | 645     |   |      |   | 1,617   |      |  |   | 1,439   |  
|California                                                                                                        |  |                         | 699     |   |      |   | 208     |      |  |   | 1,670   |  
|Corporate, general and administrative expenses                                                                    |  |                         | (7,891  | ) |      |   | (7,157  | )    |  |   | (6,916  | )
|Restructuring costs and other charges                                                                             |  |                         | (2,329  | ) |      |   | (4,256  | )    |  |   | (835    | )
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Total operating income (loss)                                                                                     |  |                         | (6,705  | ) |      |   | (4,492  | )    |  |   | 3,344   |  
|Interest expense                                                                                                  |  |                         | 7,960   |   |      |   | 5,627   |      |  |   | 3,206   |  
|Other (income) expense                                                                                            |  |                         | (68     | ) |      |   | (33     | )    |  |   | 52      |  
|Gain on early extinguishment of debt                                                                              |  |                         |        |   |      |   | (17,334 | )    |  |   | (21,856 | )
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle |  | $                       | (14,597 | ) |      | $ | 7,248   |      |  | $ | 21,942  |  
|                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  



|                                     |  |                         |        |      |   |       
|------------------------------------ |  | ----------------------- | ------ | ---- | - | ------
|                                     |  | Year Ended December 31,
|                                     |  | 2002                    |        | 2003
|Assets:                              |  |                         |        |      |   |       
|Texas                                |  | $                       | 21,992 |      | $ | 22,621
|Florida                              |  |                         | 2,824  |      |   | 3,007 
|Tennessee                            |  |                         | 5,088  |      |   | 5,662 
|California                           |  |                         | 8,462  |      |   | 8,861 
|                                     |  |                         |        |      |   |       
|Total assets for reportable segments |  |                         | 38,366 |      |   | 40,150
|Unallocated amounts                  |  |                         | 2,590  |      |   | 1,424 
|                                     |  |                         |        |      |   |       
|Total assets                         |  | $                       | 40,956 |      | $ | 41,574
|                                     |  |                         |        |      |   |       



F-27



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##### Table of Contents

Exhibit A



CASTLE DENTAL CENTERS, INC.



Code of Ethics for the Chief Executive Officer

and Senior Financial Officers



The Chief
Executive Officer, Chief Financial Officer, principal accounting officer or Controller, and other senior financial officers performing similar functions (collectively, the Officers) of Castle Dental Centers, Inc. (the
Company) each have an obligation to the Company, its shareholders, the public investor community, and themselves to maintain the highest standards of ethical conduct. In recognition of this obligation, the Company has
adopted the following standards of ethical conduct for the purpose of promoting:



| |  | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Full, fair accurate, timely and understandable disclosure in the reports and documents that the Company files with, or submits to, the Securities and Exchange Commission (the
SEC), and in other public communications made by the Company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Compliance with applicable governmental laws, rules and regulations;
| | - | --------------------------------------------------------------------



| |  | The prompt internal reporting to an appropriate person or persons identified herein of violations of this Code of Ethics; and
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | Accountability for an adherence to this Code of Ethics.
| | - | -------------------------------------------------------



Adherence to these standards is integral to achieving the objectives of the Company and its shareholders. The Officers shall not commit acts contrary to
these standards nor shall they condone the commission of such acts by others within the Company.



Competence



The
Officers have a responsibility to:



| |  | Maintain an appropriate level of professional competence through the ongoing development of their knowledge and skills.
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Perform their professional duties in accordance with relevant laws, regulations, and technical standards.
| | - | ---------------------------------------------------------------------------------------------------------



| |  | Prepare financial statements on a timely basis in accordance with generally accepted accounting principles.
| | - | -----------------------------------------------------------------------------------------------------------



| |  | Provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Commission and in other public
communications made by the Company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Confidentiality



The Officers have a responsibility to protect the Company
by:



| |  | Refraining from disclosing confidential information (regarding the Company or otherwise) acquired in the course of their work except when authorized, unless legally obligated to do
so.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A-1



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##### Table of Contents

| |  | Informing subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitoring their activities to assure the maintenance of
that confidentiality.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Refraining from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third
parties.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Integrity



The Officers have a responsibility to:



| |  | Comply with laws, rules and regulations of federal, state and local governments, and appropriate private and public regulatory agencies or organizations, including insider trading
laws.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Act in good faith, responsibility, without misrepresenting material facts or allowing their independent judgment to be subordinated.
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | Protect the Companys assets and insure their efficient use.
| | - | ------------------------------------------------------------



| |  | Avoid actual or apparent conflicts of interest with respect to suppliers, customers and competitors.
| | - | ----------------------------------------------------------------------------------------------------



| |  | Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.
| | - | -------------------------------------------------------------------------------------------------------------



| |  | Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Report to senior management and the Audit Committee any significant information they may have regarding judgments, deficiencies, discrepancies, errors, lapses or any similar matters
relating to the Companys or its subsidiaries accounting, auditing or system of internal controls. The officers must communicate unfavorable as well as favorable significant information and professional judgments or opinions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Refrain from engaging in or supporting any activity that would discredit their profession or the Company and proactively promote ethical behavior within the Company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Objectivity



The Officers have a responsibility to:



| |  | Communicate information fairly and objectively.
| | - | -----------------------------------------------



| |  | Disclose all material information that could reasonably be expected to influence intended users understanding of the reports, comments and recommendations presented.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Oversight and Disclosure



The Officers have a responsibility to:



| |  | Ensure the preparation of full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the SEC.
Accordingly, it is the responsibility of the
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A-2



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##### Table of Contents

| | Officers to promptly bring to the attention of the Audit Committee any material information of which he or she may become aware that affects the disclosures
made by the Company in its public filings or otherwise assist the Audit Committee in fulfilling its responsibilities of overseeing the Companys financial statements and disclosures and internal control systems.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Promptly bring to the attention of the Audit Committee any information he or she may have concerning (1) significant deficiencies in the design or operation of internal controls
which could aversely affect the Companys ability to record, process, summarize and report financial data or (2) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys
financial reporting, disclosures or internal controls.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Promptly bring to the attention of the CEO or internal legal counsel, if any, and to the Audit Committee any information he or she may have concerning any violation of this Code of
Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employee who has a significant role in the Companys financial reporting, disclosures or internal
controls.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Promptly bring to the attention of the CEO or internal legal counsel, if any, and to the Audit Committee any information he or she may have concerning evidence of a material
violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of this Code of Ethics.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Enforcement



The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in
the event of violations of this Code of Ethics. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code of Ethics, and shall include written notices to the individual involved that the
Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individuals
employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a
single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the
individual in question had committed other violations in the past.



IN WITNESS WHEREOF,the undersigned Officer certifies that he or she has read the above Code of Ethics and agrees to abide thereby.



|            
|------------
|            
|            
|            
|(Signature) 
|            
|            
|            
|(Print Name)



Date:
, 2004



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REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE



To the Board of Directors and Stockholders of

Castle Dental Centers, Inc.:



Our audits of the consolidated financial statements referred to in our report dated March 30, 2004 appearing in this 2003 Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.



PricewaterhouseCoopers LLP



Houston, Texas

March 30, 2004



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##### Table of Contents

CASTLE DENTAL CENTERS, INC.



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(In thousands)



|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|------------------------------------------------------------------- |  | ----------------------- | ------ | ------------------ | - | ----- | ---------- |  | ----- | ----- |  | -------------------- | ---- | ---- |  | - | ------
|Patient Receivables:                                                |  | BalanceBeginningOf Year |        | Charged ToExpenses |   |       | Deductions |  | Other |       |  | BalanceAt EndOf Year
|Year ended December 31, 2001:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - patient receivables          |  | $                       | 12,041 |                    | $ | 4,897 |            |  | $     | 3,290 |  | $                    | (93  | )(1) |  | $ | 13,555
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Year ended December 31, 2002:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - patient receivables          |  | $                       | 13,555 |                    | $ | 4,765 |            |  | $     | 1,146 |  | $                    | (228 | )(1) |  | $ | 16,946
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Year ended December 31, 2003:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - patient receivables          |  | $                       | 16,946 |                    | $ | 3,924 |            |  | $     | 1,238 |  | $                    |     |      |  | $ | 19,632
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|                                                                    |  |                         |        |                    |  
|Unbilled Patient Receivables:                                       |  | BalanceBeginningOf Year |        | Charged ToExpenses |   |       | Deductions |  | Other |       |  | BalanceAt EndOf Year
|Year ended December 31, 2001:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - unbilled patient receivables |  | $                       | 738    |                    | $ | 51    |            |  | $     |      |  | $                    | (72  | )    |  | $ | 717   
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Year ended December 31, 2002:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - unbilled patient receivables |  | $                       | 717    |                    | $ | (14   | )          |  | $     |      |  | $                    |     |      |  | $ | 703   
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Year ended December 31, 2003:                                       |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       
|Allowance for uncollectible accounts - unbilled patient receivables |  | $                       | 703    |                    | $ | (60   | )          |  | $     |      |  | $                    |     |      |  | $ | 643   
|                                                                    |  |                         |        |                    |   |       |            |  |       |       |  |                      |      |      |  |   |       



|(1) | Adjustments to patient accounts that are charged to the allowance for doubtful accounts.
|--- | ----------------------------------------------------------------------------------------



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(a) (3) Exhibits



|              |  |                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | ----------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                       
|              | 
|2.            |  | Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.*
|              | 
|3.            |  | Articles of Incorporation and By-laws                                        
|              |  |                                                                              
|              |  | 3.1                                                                           |  | Amended and Restated Certificate of Incorporation of Castle Dental Centers, Inc. (incorporated by reference from Exhibit 3.1 of the Companys Annual Report on Form 10-K for the period
ended December 31, 2001, File No. 001-13263)                                                                                                                                                                             
|              |  |                                                                              
|              |  | 3.2                                                                           |  | Amendment to Certificate of Incorporation dated January 28, 2003 (incorporated by reference from Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the period ended March 31,
2003, File No. 001-13263)                                                                                                                                                                                             
|              |  |                                                                              
|              |  | 3.3                                                                           |  | Amendment to Certificate of Incorporation dated July 1, 2003 (incorporated by reference from Exhibit 3.3 of the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2003, File No. 001-13263).                                                                                                                                                                                                 
|              |  |                                                                              
|              |  | 3.4                                                                           |  | Amended and Restated Bylaws (incorporated by reference from Exhibit 3.3 of the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003, File No.
001-13263)                                                                                                                                                                                                                                  
|              |  |                                                                              
|              |  | 3.5                                                                           |  | Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Castle Dental Centers, Inc. (incorporated by
reference from Exhibit 3.1 of the Companys Current Report on Form 8-K dated August 5, 2002, File No. 001-13263)                                                                                                        
|              |  |                                                                              
|              |  | 3.6                                                                           |  | Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Castle Dental Centers,
Inc. (incorporated by reference from Exhibit A of the Companys Information Statement on Schedule 14C Filed with the SEC on June 5, 2003, File No. 001-13263)                                                     
|              |  |                                                                              
|              |  | 3.7                                                                           |  | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Castle Dental Centers, Inc. (incorporated by reference from Exhibit 3.1 of the Companys
Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                                       
|              | 
|4.            |  | Instruments defining the rights of security holders, including indentures.   
|              |  |                                                                              
|              |  | 4.1                                                                           |  | Form of Certificate representing the Common Stock, par value $.001 per share, of Castle Dental Centers, Inc. (incorporated by reference to Exhibit 4.1 of the Companys Registration
Statement on Form S-1, filed September 3, 1996, Reg. No. 333-1335)                                                                                                                                                          
|              |  |                                                                              
|              |  | 4.2                                                                           |  | Form of Warrant Agreement among the Company and the Lenders (incorporated by reference from Exhibit 10.2 of the Companys Current Report on Form 8-K dated August 5, 2002, File No.
001-13263)                                                                                                                                                                                                                   
|              |  |                                                                              
|              |  | 4.3                                                                           |  | Preferred Stock and Subordinated Note Purchase Agreement dated as of May 15, 2003 between Castle Dental Centers, Inc. (the Company), Sentinel Capital Partners II, L.P.
(Sentinel), General Electric Capital Corporation (GECC), Midwest Mezzanine Fund II, L.P. (Midwest), Thomas P. Fitzpatrick (Fitzpatrick), John M. Slack (Slack), and James M. Usdan, an
individual (Usdan and, together with



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|    |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                        
|    |  |                         |  | Slack, Fitzpatrick, Midwest, GECC, and Sentinel, the Purchasers) (incorporated by reference from Exhibit 10.2 of the Companys Current Report on Form 8-K dated May 15, 2003,
File No. 001-13263)                                                                                                                                                                                                                                                                                          
|    |  |                        
|    |  | 4.4                     |  | Registration Rights Agreement dated as of May 15, 2003, by and among the Company and the Purchasers (incorporated by reference from Exhibit 10.3 of the Companys Current Report on Form
8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                                         
|    |  |                        
|    |  | 4.5                     |  | Stockholders Agreement dated as of May 15, 2003, by and among the Company, and the Purchasers (incorporated by reference from Exhibit 10.4 of the Companys Current Report on Form 8-K
dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                                               
|    |  |                        
|    |  | 4.6                     |  | Form of subordinated promissory note (incorporated by reference from Exhibit 10.5 of the Companys Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                                                                                                        
|    | 
|9.  |  | Voting Trust Agreement*
|    | 
|10. |  | Material Contracts     
|    |  |                        
|    |  | 10.1                    |  | Credit Agreement dated as of May 15, 2003 among the Castle Dental Centers, Inc., Castle Dental Centers of Florida, Inc., Castle Dental Centers of Tennessee, Inc., Castle Texas Holdings, Inc.,
Castle Dental Centers of Texas, Inc., CDC of California, Inc., the lenders party thereto, and General Electric Capital Corporation, as agent for the Lenders (incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form
8-K dated May 15, 2003, File No. 001-13263)
|    |  |                        
|    |  | 10.2                    |  | Sentinel Management Agreement dated as of May 15, 2003 by and among the Company and Sentinel (incorporated by reference from Exhibit 10.6 of the Companys Current Report on Form 8-K
dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                                                
|    |  |                        
|    |  | 10.3                    |  | Termination and Amendment of the Registration Rights Agreement, dated as of July 19, 2002, by and among the Company, Heller Financial, Inc. (Heller), Midwest, Usdan and certain
other stockholders of the Company (incorporated by reference from Exhibit 10.7 of the Companys Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                        
|    |  |                        
|    |  | 10.4                    |  | Termination of the Stockholders Agreement, dated as of July 19, 2002, by and among the Company, Heller, Midwest, Usdan and certain other stockholders of the Company (incorporated by reference
from Exhibit 10.8 of the Companys Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                        
|    |  |                        
|    |  | 10.5                    |  | Termination of the Investor Agreement, dated as of July 19, 2002, by and among the Company, Usdan, Heller and Midwest (incorporated by reference from Exhibit 10.9 of the Companys
Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                       
|    |  |                        
|    |  | 10.6                    |  | Amendment to Forbearance Agreement dated as of May 15, 2003, by and between Leon D. Roisman, D.M.D, Leon D. Roisman, D.M.D, Inc., Roisman Acquisition Company, CDC of California, Inc. and
Castle Dental Centers of California, L.L.C. (incorporated by reference from Exhibit 10.10 of the Companys Current Report on Form 8-K dated May 15, 2003, File No. 001-13263)                                                                                                                     
|    |  |                        
|    |  | 10.7                    |  | Employment Agreement by and between James M. Usdan and the Company dated as of May 15, 2003 (incorporated by reference from Exhibit 10.11 of the Companys Current Report on Form 8-K
dated May 15, 2003, File No. 001-13263)                                                                                                                                                                                                                                                                



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|    |  |                                                                             |  |                                                                                                                                                                                                                                                                                        
|--- |  | --------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                            
|    |  | 10.8                                                                        |  | Warrant Purchase Agreement dated as of May 14, 2003, between Banc of America Strategic Solutions, Inc., FSC Corp., Amsouth Bank and the Company (incorporated by reference from Exhibit 10.12
of the Companys Current Report on Form 8-K dated May 15, 2003, File No. 001-13263).     
|    |  |                                                                            
|    |  | 10.9                                                                        |  | General Release and Severance Agreement dated as of June 13, 2003, between James M. Usdan and Castle Dental Centers, Inc. (incorporated by reference from Exhibit 10.9 of the Companys
Quarterly Report on Form 10-Q dated June 30, 2003, File No. 001-13263)                         
|    |  |                                                                            
|    |  | 10.10                                                                       |  | Securities Purchase Agreement dated as of June 13, 2003, among James M. Usdan, Sentinel Capital Partners II, L.P. and Castle Dental Centers, Inc. (incorporated by reference from Exhibit 10.10
of the Companys Quarterly Report on Form 10-Q dated June 30, 2003, File No. 001-13263)
|    |  |                                                                            
|    |  | 10.11                                                                       |  | Amendment to Employment Agreement of Joe Keane dated August 20, 2003.                                                                                                                                                                                                                  
|    |  |                                                                            
|    |  | 10.12                                                                       |  | Amendment to Employment Agreement of John Slack dated June 13, 2003.                                                                                                                                                                                                                   
|    | 
|11. |  | Statement re computation of per share earnings*                            
|    | 
|14. |  | Code of Ethics (Incorporated by reference from Exhibit A of this Form 10-K)
|    | 
|15. |  | Letter re Unaudited Interim Financial Information*                         
|    | 
|16. |  | Letter re change in certified accountant*                                  
|    | 
|18. |  | Letter re change in accounting principles*                                 
|    | 
|19. |  | Report furnished to security holders*                                      
|    | 
|21. |  | Subsidiaries                                                               
|    | 
|22. |  | Published report regarding matters submitted to vote of security holders*  
|    | 
|23. |  | Consents of experts and counsel                                            
|    |  |                                                                            
|    |  | 23.1                                                                        |  | Consent of Independent Auditors                                                                                                                                                                                                                                                        
|    | 
|24. |  | Power of attorney*                                                         
|    | 
|31  |  | Rule 13a-14(a) Certifications                                              
|    |  |                                                                            
|    |  | 31.1                                                                        |  | Certification of Chief Executive Officer.                                                                                                                                                                                                                                              
|    |  |                                                                            
|    |  | 31.2                                                                        |  | Certification of Chief Financial Officer.                                                                                                                                                                                                                                              
|    | 
|32  |  | Section 1350 Certifications                                                
|    |  |                                                                            
|    |  | 32.1                                                                        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                           
|    |  |                                                                            
|    |  | 32.2                                                                        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                           
|    | 
|99  |  | Additional Exhibits*                                                       

---

|* | Inapplicable to this filing
|- | ---------------------------



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