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                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  ----------

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

                 FOR THE TRANSITION PERIOD FROM            TO
                        COMMISSION FILE NUMBER: 1-13263

                          CASTLE DENTAL CENTERS, INC.

                                    DELAWARE
         (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)

                                   76-0486898
                      (I.R.S. EMPLOYER IDENTIFICATION NO.)

               1360 POST OAK BOULEVARD, SUITE 1300 HOUSTON, TEXAS
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                     77056
                                   (ZIP CODE)
                                 (713) 479-8000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

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

     Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ( 229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

     As of April 16, 2001, there were 6,417,206 shares of Castle Dental Centers,
Inc. Common Stock, $.001 par value, issued and outstanding, of which 3,293,363,
having an aggregate market value of approximately $0.4 million, were held by
non-affiliates of the registrant.

     Documents Incorporated by Reference: Portions of the registrant's annual
proxy statement, to be filed within 120 days after December 31, 2000, are
incorporated by reference into Part III.

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                          TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
Item      1.   Business...................................................    1
               The Company................................................    1
               Recent Developments........................................    2
               The Dental Industry........................................    3
               Business Strategy..........................................    3
               Dental Network Development.................................    4
               Management Services Agreement..............................    5
               Dentist Employment Agreements..............................    6
               Services...................................................    6
               Operations.................................................    6
               Sales and Marketing........................................    7
               Managed Care Contracts.....................................    8
               Competition................................................    8
               Management Information Systems.............................    9
               Regulation.................................................    9
               Employees..................................................   11
               Corporate Liability and Insurance..........................   11
Item      2.   Properties.................................................   11
Item      3.   Legal Proceedings..........................................   12
Item      4.   Submission of Matters to a Vote of Security Holders........   12
Item      5.   Market for Registrant's Common Equity and Related
               Stockholder Matters........................................   13
               Recent Sales of Unregistered Securities....................   13
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........................   17
               Results of Operations......................................   17
               Liquidity and Capital Resources............................   21
               Inflation..................................................   23
Item      7A.  Quantitative And Qualitative Disclosures About Market Risk.   24
Item      8.   Financial Statements and Supplementary Data................   24
Item      9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure........................   24
Item     10.   Directors and Executive Officers of the Registrant.........   25
Item     11.   Executive Compensation.....................................   25
Item     12.   Security Ownership of Certain Beneficial Owners
               and Management.............................................   25
Item     13.   Certain Relationships and Related Transactions.............   25
Item     14.   Exhibits, Financial Statement Schedules and Reports
               on Form 8-K................................................   26

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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 develops, 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's strategy is to provide high-quality
care in selected markets with a view to achieving broad geographic coverage
within those markets. The Company seeks to achieve operating efficiencies by
consolidating and integrating affiliated practices into regional networks,
realizing economies of scale in such areas as marketing, administration and
purchasing and enhancing the revenues of its affiliated dental practices by
increasing both patient visits and the range of specialty services offered. As
of December 31, 2000, the Company provided management services to 101 dental
centers with approximately 200 affiliated dentists, orthodontists and other
dental specialists.

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

  The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payers and intends
to continue to pursue managed care contracts. The Company negotiates capitated
managed care contracts on behalf of its affiliated dental practices, which
maintained an aggregate of 40 capitated managed care contracts covering
approximately 170,000 members at December 31, 2000.  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 by Jack H. Castle, D.D.S. and Jack H. Castle,
Jr., 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.

  At December 31, 1997, the Company operated 42 dental centers, with 25 in
Texas, 6 in Tennessee and 11 in Florida. In March 1998, the Company acquired six
dental centers in Houston owned by Dental World, Inc. Also in March 1998, the
Company expanded into the southern California market through the acquisition of
an 80% interest in ("Castle West") a company formed to acquire Dental Consulting
Services LLC, which managed five dental centers in the Los Angeles area.
Subsequent to March 1998, Castle West acquired four additional dental offices in
the Los Angeles area, one of which was closed in 2000.  In July 1998, the
Company acquired a dental management company and five related dental practices
in Florida. In December 1998, the Company acquired from Dental Centers of
America and its affiliated dental practices 16 dental centers in San Antonio,
Austin, Waco and the Dallas/Fort Worth metroplex.  In January 2000, the Company
acquired the 20% minority in Castle West that it did not previously own. The
Company opened 9, 20 and 4 de novo offices in

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1998, 1999 and 2000, respectively. The Company closed or consolidated 8 dental
centers in 1999 and 2000. At December 31, 2000, the Company operated 65, 12, 17
and 7 dental centers in Texas, Tennessee, Florida and California, respectively.

RECENT DEVELOPMENTS

  In January 2000, the Company entered into a senior subordinated note agreement
("Subordinated Note Agreement") and a subordinated convertible note agreement
("Convertible Note Agreement") pursuant to which it borrowed $13.7 million and
$1.3 million, respectively, and, in connection with such other borrowings,
amended its existing bank credit agreement (the "Credit Agreement" and, together
with the Subordinated Note Agreement and the Convertible Note Agreement, the
"Debt Agreements"). In March 2000, as a result of write-downs of the Company's
accounts receivable, the Company determined that it was in violation of
financial covenants under the Debt Agreements. Accordingly, in May 2000, the
Company amended the Debt Agreements to cure its covenant violations and to
provide additional availability for the Company to complete the de novo dental
centers that were under development in 2000. In June 2000, the Company recorded
litigation expenses of $1,495,000 resulting from an adverse arbitration award in
an arbitration proceeding in Los Angeles, California. As a result of this
litigation expense, the Company was again in default under the Debt Agreements.

  The Company reported additional losses in the third and fourth quarters of
2000 and, as a result, has not been in compliance with the financial covenants
of the Debt Agreements since June 30, 2000. At December 31, 2000, approximately
$45.2 million in senior debt and $15 million in subordinated debt were
outstanding under the Debt Agreements in addition to approximately $3.5 million
in other outstanding subordinated debt. Since the Company is in default under
these agreements, all amounts outstanding are subject to acceleration and have
been classified as current liabilities.

  On February 15, 2001, the Company retained Getzler and Co., a New York based
turnaround specialist, to assist the Company in addressing its operational
issues and restructuring of the Company's debt. The Company's board of directors
has appointed Getzler's designee, Ira Glazer, to serve as the Company's acting
Chief Executive Officer and initiated an executive search for a permanent Chief
Executive Officer. Jack Castle, Jr., the Company's former Chief Executive
Officer, continues to serve as the Company's Chairman of the Board. The
Company's President and Chief Operating Officer resigned to pursue other
opportunities.

  The Company has continued to pay interest (other than default interest) on the
amounts outstanding under the Credit Agreement, but has not made principal or
interest payments of $1.9 million owed to subordinated creditors since July
2000. The Company has requested waivers of these covenant violations, a
forbearance of scheduled principal payments and is negotiating with its lenders
to restructure the Debt Agreements. However, these negotiations have not
resulted in a forbearance agreement or waivers of the defaults as of April 16,
2001. Given the financial position of the Company and the current condition of
financial markets, the Company believes that it is unlikely that either a new
lender group will be brought in to replace the existing lender group or that an
equity investment by a third party in the Company will be obtained that would be
sufficient to satisfy its capital needs.

  The Company believes that it will be able to continue to make interest
payments, exclusive of default interest, on its outstanding debt, but was not
able to make required principal payments on its senior debt, which began
becoming due in March 2001. There can be no assurance that the Company's lenders
will consent to the waivers and restructuring necessary to allow the Company to
continue to operate. If the Company and its lenders cannot reach an agreement,
it may be necessary for the Company to seek protection under Chapter 11 of the
Bankruptcy Code. These factors, among others, may indicate that the Company will
be unable to continue as a going concern for a reasonable period of time.

  The Company has developed a plan that will allow it to continue to operate
without the need for additional borrowings and to make principal payments to its
senior bank creditors out of available funds. Components of this plan include:
(i) reorganization of field management to improve efficiency and reduce regional
overhead costs; (ii) reduction in corporate general and administrative costs
through job eliminations and reduction in

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other overhead expenses; (iii) closing of unprofitable and under-performing
dental centers; (iv) realignment of accounts receivable management to focus on
improved collection of insurance and patient receivables; (v) restructuring of
compensation for management to emphasize performance-based incentives; and, (vi)
cancellation of further de novo development and reducing capital expenditures to
maintenance levels of approximately $1.2 million for 2001.

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

THE DENTAL INDUSTRY

  Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. According to the American Dental Association 1996 Survey of
Dental Practice ("ADA Survey"), there were approximately 152,000 actively
practicing dental professionals in the U.S., of which approximately 8,900 were
practicing orthodontists. Nearly 88% of the nation's private practitioners work
either as sole practitioners or in a practice with one other dentist. The
balance of these dentists practice in about 4700 groups of three or more
dentists. However, dental, orthodontic and other specialty practices have
followed the trend of the health care industry generally and are increasingly
forming larger group practices.

  The annual aggregate domestic market for dental services was estimated by the
Health Care Financing Administration, Health Care Financing Review (1999) to be
approximately $53.8 billion for 1998, representing approximately 4.7% of total
health care expenditures in the United States, and is projected to reach $93.1
billion by 2008. 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 8.0% from
1980 to 1998, and is projected to grow at a compound annual growth rate of
approximately 6.0% through the year 2008. In contrast to other health care
expenditures, dental services are primarily paid for by the patient. According
to the U.S. Department of Health and Human Services, in 1998, consumer out-of-
pocket expenditures accounted for 48% of the payment for dental services,
compared to 16% for other medical services.

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

  Concerns over the accelerating cost of health care have resulted in the
increasing importance of managed care in the dental industry. Managed care
typically involves a third party (frequently the payer) assuming responsibility
for ensuring that health care is provided in a high quality, cost-effective
manner. According to industry sources, approximately 18% of the estimated 147
million people covered by dental benefits in 1997 were enrolled in managed care
programs. Enrollment in managed dental care plans, according to the National
Association of Dental Plans, is estimated to have grown from 7.8 million
patients in 1990 to 22.8 million patients in 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

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  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
  significantly differentiates it from both individual and multi-center
  practices that typically offer only general dentistry, orthodontics or other
  single specialty dental1 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.

     Market its Networks to Managed Care Entities. The Company believes that
  managed care will play an increasing role in the provision of dental services
  and therefore intends to market the services of its dental practice networks
  to the managed care community. The Company believes that contracting with
  managed care entities will facilitate entry into new markets and the expansion
  of existing networks, as well as improve the utilization of existing
  facilities by providing a source of patients to dentists with whom the Company
  is affiliated. In addition, such contracts, including capitated contracts,
  enable the Company to leverage its infrastructure and marketing efforts by
  increasing patient visits.

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 has no plans to develop any
de novo dental centers in 2001.

De novo Development

  The Company has opened 24 newly developed dental centers since 1999; three in
Houston, two in Austin, three in Dallas/Fort Worth, five in San Antonio, two in
Corpus Christi, Texas, six 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 costs approximately $315,000 in leasehold improvements,
signage, and dental and office equipment, depending primarily on the size of the
dental facility. All new dental centers in the Company's existing markets
utilize the Castle Dental Centers name and logo.

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  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, 2000. Until such
time as the Company's liquidity improves, the Company anticipates that it will
not open or acquire any additional 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 Company is paid a monthly management
fee comprised of three components: (i) the costs incurred by it on behalf of the
affiliated practice; (ii) a base management fee in an amount ranging from 12.5%
to 20.0% of adjusted gross revenues; and (iii) a performance fee equal to the
patient revenues of the affiliated dental practice less (a) the expenses of the
affiliated dental practice and (b) the sum of (i) and (ii), as described in each
agreement. In California, the Company is paid a monthly management fee comprised
of two components: (i) the costs incurred by it on behalf of the affiliated
practice and (ii) a management fee in an amount ranging from 15.0% to 30.0% of
net patient revenues. With respect to the three of the California professional
corporations, the Company is paid a bonus equal to 30% of patient revenues in
excess of average monthly patient revenues over the prior two-year period. The
amount of the management fee is reviewed by the Company and the affiliated
dental practice not less frequently than annually in order to determine whether
such fee should be adjusted, up or down, to continue to reflect the fair value
of the management services rendered by the Company.

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

  The typical management services agreement is for an initial term of 25 to 40
years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. As part of the management services agreement, the Company requires that
the majority shareholder of the affiliated dental practice execute an option
agreement that grants the Company's designee the right to acquire all the
shareholder's interest in the practice at a nominal cost. The Company can
exercise the option at any time on 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, 2000, each of the Company's affiliated dental practices were
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.

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

OPERATIONS

Center Design and Location

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

  Since its formation, the Company has adapted its locations to accommodate the
full range of dental specialties. 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.

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Staffing and Scheduling

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

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 ranging from $88
to $98 per month, with an average contract period of approximately 26 months.
After consultation with the orthodontic staff at the initial visit, the patient
signs a contract outlining the terms of the treatment, including the anticipated
length of treatment and the total fees. The number of required monthly payments
is fixed at the beginning of the case and corresponds to the anticipated number
of monthly treatments.  In 1999, the Company adopted a payment policy requiring
that new orthodontic patients arrange for an automatic monthly bank draft.
Previously existing patients are billed in advance by the Company on a monthly
basis.

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
bring to its affiliated dental practices improvements in their recruiting and
professional training. The Company expects that the increased visibility of the
Company, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets will give it an advantage in
recruiting and retaining dentists. In addition, the Company believes that the
ability to offer dentists in private practice the chance to practice in an
environment where they do not assume capital risks and administrative burdens
normally associated with private practice will make joining the Company an
attractive choice for private practitioners.


SALES AND MARKETING

  The Company has established a consistent national identity for its business
and to utilizes the "Castle Dental Centers" name and logo at all its dental
centers. As of December 31, 2000, the Castle Dental Centers name had been
implemented at all affiliated locations except for two dental centers in
California.  The Company applies traditional retail principles of business to
the provision of dental care. These principles

                                       7
<PAGE>

include network development, extended hours of operation, location optimization,
signage, customized treatment schedules, affordable fees and payment plans. The
Company uses both print advertising and professionally produced broadcast
advertising to market its dental services to potential patients.

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

MANAGED CARE CONTRACTS

  The Company negotiates, on behalf of its affiliated dental practices,
contracts with dental healthcare maintenance organizations, insurance companies,
self insurance plans and other third-party payers pursuant to which services are
provided on some type of discounted fee-for-service or capitated basis.  Under
capitated contracts the affiliated dental practice receives a predetermined
amount per patient per month in exchange for providing certain necessary covered
services to members of the plan. Usually, the capitated plans also provide for
supplemental payments and/or co-payments by members for certain higher cost
procedures such as crowns, root canal therapy and dentures. These contracts
typically result in lower average fees for services than the usual and customary
fees charges by the Company's affiliated dental practices and may, in certain
instances, expose the Company to losses on contracts where the total revenues
received are less than the costs of providing such dental care.  The Company
generally bears the risk of such loss because it consolidates the financial
results of its affiliated dental practices.  However, most of these contracts
are cancelable by either party on 30 to 90 days written notice thereby reducing
the risk of long-term adverse impact on the Company.

  At December 31, 2000, the Company and its affiliated dental practices
maintained an aggregate of 40 capitated managed care contracts covering
approximately 170,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $9.1 million, or approximately 8.6% of total
patient revenues in 2000. No single contract amounted to a significant portion
of the Company's revenues, as each of the Company's regional operations
contracts separately with managed care providers. The Company periodically
evaluates its capitated managed care contracts by comparing the average
reimbursement per procedure plus the total capitation fees per contract to the
usual and customary fees charged by the affiliated dental practice. If the
aggregate reimbursement percentage for the capitated contract exceeds 55% of the
usual and customary fees, the Company believes that the incremental costs of
providing covered services are being recovered. Management believes that
capitated managed care contracts, in the aggregate, are profitable and will
continue to increase as a percentage of total patient revenues in the future.

  A component of the Company's strategy is to seek long-term relationships with
insurance companies on a regional and national basis.  The expanded networks of
dentists and dental specialists in the Company's markets makes the Company's
dental networks attractive to insurance companies and other third-party payers.
Management believes that negotiating with major dental healthcare providers on a
national basis will result in better coordination and improved financial results
from its managed care contracts.

COMPETITION

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

                                       8
<PAGE>

and may have longer established relationships with buyers of such services.

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

MANAGEMENT INFORMATION SYSTEMS

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

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

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. In connection with its operations in existing markets
and expansion into new markets, the Company may become subject to compliance
with additional laws, regulations and interpretations or enforcement thereof.
The ability of the Company to operate profitably will depend in part upon the
Company and its affiliated dental practices obtaining and maintaining all
necessary licenses, certifications and other approvals and operating in
compliance with applicable health care regulations.

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

Medicare and Medicaid Fraud and Abuse

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

                                       9
<PAGE>

  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 "designated
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 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.

                                       10
<PAGE>

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

Regulatory Compliance

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

EMPLOYEES

  As of December 31, 2000, the Company and its affiliated dental practices
employed approximately 985 administrative and dental office personnel on a full-
time or part-time basis, and the affiliated dental practices employed
approximately 200 general dentists and specialists on a full-time or part-time
basis. The Company generally enters into employment or independent contractor
agreements with its affiliated dentists. The Company believes that its relations
with its employees are good.

CORPORATE LIABILITY AND INSURANCE

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

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

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

ITEM 2. PROPERTIES

  The Company leases approximately 12,000 square feet of space for executive,
administrative, sales and marketing and operations offices in Houston, Texas.
The Company's initial lease term, which expired in May 2000, has been extended
at the Company's option for an additional 12 months. The Company will relocate
its corporate headquarters in June 2001 to another leased location in Houston
with approximately 9,600 square feet of office space.

                                       11
<PAGE>

  All of the Company's existing centers are leased. Three of the centers are
owned by affiliates of the companies from whom the Company acquired affiliated
dental practices and one dental center is owned by a director 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 2001 and 2009 excluding options to renew.

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

ITEM 3. LEGAL PROCEEDINGS

  In August 1998, the former owner of certain dental practices acquired by the
Company in August 1996, filed a lawsuit against the Company in the 190th
District Court of Harris County, Texas. The lawsuit alleged that the Company
committed various acts of fraud, securities fraud, conspiracy, breach of
contract and misrepresentation concerning the value of the Company's common
stock issued in the acquisition of the dental practices. In August 1999, the
Company settled the lawsuit and recorded a one-time charge of $1.4 million, all
of which has been paid.

  In December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction. In August 2000, the arbitrator found that the subsidiaries had
breached a contractual agreement to complete the acquisition and awarded the
plaintiffs actual damages and costs of $442,000. In August 2000, the arbitrator
awarded the plaintiffs an additional $666,000 for attorney fees and costs,
resulting in a total judgment of $1,108,000 against the Company's subsidiaries.
This amount, as well as additional legal expenses incurred by the Company, was
included in the litigation expenses of $1.5 million recorded in June 2000. None
of the judgment amount awarded to the plaintiffs has been paid as of April 16,
2001.

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

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

  None

                                       12
<PAGE>

                               PART II

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

  The Company's Common Stock is traded in the over-the-counter market and quoted
on the Nasdaq National Market under the symbol "CASL." The following table
presents the quarterly high and low sale prices as reported by the Nasdaq
National Market for the quarters indicated. These quotations reflect the inter-
dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.

                                                  HIGH         LOW
             1999:
             -----
             First Quarter........................ 7.00        5.31
             Second Quarter....................... 8.25        6.25
             Third Quarter........................ 6.56        2.50
             Fourth Quarter....................... 4.09        2.13

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

  In March 2001, the Company received notification from the Nasdaq National
Market that it failed to meet the minimum market value of public float and
minimum bid price requirements as set forth in the Nasdaq Marketplace Rules, and
that its Common Stock is therefore subject to delisting from the Nasdaq National
Market. The Company requested a hearing before a Nasdaq Listing Qualifications
Panel to review the delisting notification. The hearing is scheduled for April
19, 2001. There can be no assurance that the Nasdaq will grant the Company's
request for continued listing. If its request is denied, the Company intends to
have its common stock trade on the OTC bulletin board.

  As of April 16, 2001, there were 6,417,206 shares of the Company's Common
Stock outstanding held by approximately 42 stockholders of record. The Company
believes there are approximately 1,000 beneficial owners of the Common Stock.

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

RECENT SALES OF UNREGISTERED SECURITIES

  On March 24, 1998, in connection with the acquisition by the Company of all of
the outstanding capital stock of Dental World, Inc. ("Dental World"), the
Company issued 23,342 shares of common stock to Reality, Ltd., the sole
shareholder of Dental World.

  On March 30, 1998, the Company, through its wholly owned subsidiary, CDC of
California, Inc. ("CDC"), formed Castle Dental Centers of California, L.L.C.
("Castle West") for the purpose of acquiring the business of Dental Consulting
Services, LLC ("DCS"). In connection with this acquisition, the Company issued
an aggregate of $2,689,151 in its 8% subordinated promissory notes due March 30,
2001 to the five members of DCS ("DCS Members"). Following Castle West's
formation: (i) CDC owned the Class A Membership Interest and the Class D
Membership Interest in Castle West; (ii) sole-purpose corporations owned by the
DCS Members ("Corporate B Members") collectively owned 100% of DCS, which owned
the Class B Membership Interest in Castle West; and (iii) sole-purpose
corporations (the "Corporate C Members") owned by the DCS Members plus one
additional person collectively owned 100% of Castle West Holdings, L.L.C.
("Holdings"), which owned the Class C Membership Interest in Castle West. The
Corporate B Members as a group were granted the one-time right (the "B Merger
Option"), beginning March 30, 1999, to merge all of the Corporate B Members into
CDC in exchange for the issuance of shares of the Company's common stock. The
number of shares of common stock issuable upon exercise of the B Merger Option
("B Merger Consideration") was initially set at 407,452 shares of common stock,
subject to an adjustment based upon the purchase price of practices acquired by
Castle West between the closing of such transaction and the one-year anniversary
thereof.  Each Corporate C Member was granted the one-time right (the "C Merger
Option"), beginning March 30, 2000, to merge into CDC in exchange for cash,
notes and common stock. The

                                       13
<PAGE>

consideration to be received upon the exercise of the C Merger Option ("C Merger
Consideration") is based upon the economic performance of Castle West following
the closing date of the DCS acquisition. At least 50% of the C Merger
Consideration was payable by CDC in common stock (based upon its trading price)
and, if a Corporate C Member elects to receive more than 25% of the C Merger
Consideration in cash, CDC would have the option of delivering a promissory note
of Castle for the amount by which such cash payment would otherwise exceed 25%
of the C Merger Consideration. On January 28, 2000, CDC acquired the Class B
Membership Interest and the Class C Membership Interest in Castle West from DCS
and Holdings, respectively, and the B Merger Option and the C Merger Option were
cancelled. CDC now owns all of the outstanding membership interests in Castle
West.

  On July 9, 1998, in connection with the Company's acquisition of the assets of
Jared Woolf, D.D.S. & Associates of Palmetto, P.A., Jared Woolf, D.D.S. &
Associates of Venice, P.A. and Woolf Dentistry, P.A. ("Woolf Dentistry"), the
Company issued 15,424 shares of common stock to Woolf Dentistry. In connection
with this acquisition, the Company issued an aggregate of $370,000 in its 9%
subordinated promissory notes due July 9, 2001 to Woolf Dentistry. On that same
date, in connection with the Company's acquisition of the stock of Dentcor,
Inc., the Company issued an aggregate of 20,566 shares to the two shareholders
of Dentcor, Inc.

  On August 1, 1998, in connection with the acquisition by the Company of all of
the outstanding capital stock of NA Dental Management, Inc., the Company issued
3,635 shares of common stock and $32,580 in its 8% subordinated promissory notes
due June 30, 2000 to the sole shareholder of NA Dental Management, Inc.

  In September 1997, the Company issued 119,231 shares of Series B Convertible
Preferred Stock (the "Series B Stock") in connection with the acquisition of SW
Dental. The number of shares issued were equivalent to $1,550,000 divided by the
initial public offering price of the Company's common stock of $13.00 per share.
The Series B Stock was convertible at the holder's option, for a thirty-day
period beginning one year after its issuance into an equivalent number of shares
of the Company's common stock. On October 1, 1998, the holder of the 119,231
shares of Series B Preferred Stock exercised the right to redeem the shares into
an 8% subordinated note, due June 2002, in the original principal amount of
$1,550,000, payable in quarterly installments of $114,000 in principal and
interest.

  On December 30, 1998, in connection with the Company's acquisition of the
assets of DCA Limited Partnership, L.L.P. ("DCA") and Dental Administrators of
Texas Limited Partnership, L.L.P. ("DAI") and 16 related dental practices, the
Company issued 79,352 and 45,648 shares of common stock to DCA and DAI,
respectively. In addition, in connection with such acquisition, the Company
issued to DCA and DAI an aggregate of $1,250,000 in 6% Subordinated Promissory
Notes due December 30, 2001.

  Each of the foregoing transactions was exempt from registration under Section
4(2) of the Securities Act, no public offering being involved.

                                       14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                             --------------------------------------------------------------------
                                                                1996           1997          1998          1999          2000
                                                             ----------    -----------    ----------    -----------   -----------
                                                                             (in thousands, except per share data)
<S>                                                          <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues.......................................  $   29,601    $    46,225    $   74,823    $   102,701   $   106,023
Expenses:
 Dentist salaries and other professional costs.............       7,454         11,325        18,516         26,984        28,384
 Clinical salaries.........................................       6,760         10,248        16,612         21,408        20,795
 Dental supplies and laboratory fees.......................       3,120          4,335         7,197          9,641        11,730
 Rental and lease expense..................................       1,592          2,590         4,091          6,203         7,608
 Advertising and marketing.................................       1,522          2,033         2,763          3,650         3,847
 Depreciation and amortization.............................       1,033          1,987         3,535          5,792         6,796
 Other operating expenses..................................       1,682          2,467         4,431          6,154         7,344
 Bad debt expense..........................................       1,231          1,847         2,545          4,160        15,325
 General and administrative................................       4,292          5,929         8,145         10,909        13,128
 Asset impairment..........................................           -              -             -              -         3,567
                                                             ----------    -----------    ----------    -----------   -----------
    Total expenses.........................................      28,686         42,761        67,835         94,901       118,524
                                                             ----------    -----------    ----------    -----------   -----------
Operating income (loss)....................................         915          3,464         6,988          7,800       (12,501)
Litigation settlement......................................           -              -             -          1,366         1,495
Interest expense...........................................       2,651          2,937         1,969          4,369         7,751
Other (income) expense.....................................         (89)           (84)          (57)            34           (28)
                                                             ----------    -----------    ----------    -----------   -----------
Income (loss) before income taxes
 And extraordinary loss....................................      (1,647)           611         5,076          2,031       (21,719)
Provision (benefit) for income taxes.......................        (561)           200         1,490            835        (2,595)
                                                             ----------    -----------    ----------    -----------   -----------
Income (loss) before extraordinary loss....................      (1,086)           411         3,586          1,196       (19,124)
Extraordinary loss.........................................           -         (3,195)            -              -             -
                                                             ----------    -----------    ----------    -----------   -----------
Net income (loss)..........................................      (1,086)        (2,784)        3,586          1,196       (19,124)
Preferred stock dividends (1)..............................           -         (1,930)            -              -             -
                                                             ----------    -----------    ----------    -----------   -----------
Net income (loss) attributable to common stock.............  $   (1,086)   $    (4,714)   $    3,586    $     1,196   $   (19,124)
                                                             ==========    ===========    ==========    ===========   ===========
Income (loss) per common share:
 Basic and diluted:
  Income (loss) before extraordinary loss..................  $    (0.34)   $      0.10    $     0.54    $      0.18   $     (2.96)
  Extraordinary loss.......................................           -          (0.78)            -              -             -
                                                             ----------    -----------    ----------    -----------   -----------
  Net income (loss)........................................  $    (0.34)   $     (0.68)   $     0.54    $      0.18   $     (2.96)
                                                             ==========    ===========    ==========    ===========   ===========
Weighted average number of common and
  common equivalent shares outstanding
     Basic.................................................       3,191          4,100         6,586          6,825         6,451
                                                             ==========    ===========    ==========    ===========   ===========
     Diluted...............................................       3,191          4,132         6,608          6,850         6,451
                                                             ==========    ===========    ==========    ===========   ===========
</TABLE>

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

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                     -----------------------------------------------------------------
                                                        1996          1997         1998         1999           2000
                                                     ----------    ----------   ----------   -----------   -----------
                                                                                   (in thousands)
<S>                                                  <C>           <C>         <C>          <C>           <C>
BALANCE SHEET DATA:
Cash and cash equivalents                            $      119    $    2,908   $      695   $        59   $       901
Working capital (deficit)                                (3,244)        3,917       10,345        15,768       (62,259)
Total assets                                             29,098        44,513      100,035       114,982        95,386
Long-term debt, less current portion                     20,529         3,659       44,937        53,996           429
Redeemable preferred stock                                2,928         1,550           --            --            --
Total stockholders' equity (deficit)                     (3,509)       31,113       36,397        37,163        18,039
</TABLE>

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

Introduction

  The Company develops, 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. The Company's strategy is to provide
high-quality care in selected markets with a view to achieving broad geographic
coverage within those markets. The Company seeks to achieve operating
efficiencies by consolidating and integrating affiliated practices into regional
networks, realizing economies of scale in such areas as marketing,
administration and purchasing and enhancing the revenues of its affiliated
dental practices by increasing both patient visits and the range of specialty
services offered. As of December 31, 2000, the Company provided management
services to 101 dental centers with approximately 200 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. The Company applies
traditional retail principles of business to the practice of dentistry,
including situating practices in high-profile locations, offering 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 will enable affiliated dentists,
orthodontists and other dental specialists to focus on delivering quality
patient care and to realize greater productivity than traditional retail and
small group dental practices.

  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
30 to 90 days written notice thereby reducing the risk of long-term adverse
impact on the Company.

  At December 31, 2000, the Company and its affiliated dental practices
maintained an aggregate of 40 capitated managed care contracts covering
approximately 170,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $9.1 million, or approximately 8.6% of total
patient revenues, in 2000. No single contract amounted to a significant portion
of the Company's revenues, as each of

                                       16
<PAGE>

the Company's regional operations contracts separately with managed care
providers. The Company periodically evaluates its capitated managed care
contracts by comparing the average reimbursement per procedure plus the total
capitation fees per contract to the usual and customary fees charged by the
affiliated dental practice. If the aggregate reimbursement percentage for the
capitated contract exceeds 55% of the usual and customary fees, the Company
believes that the incremental costs of providing covered services are being
recovered. Management believes that capitated managed care contracts, in the
aggregate, are profitable and the Company will continue to contract with
capitated managed care providers on a case-by-case basis.

COMPONENTS OF REVENUES AND EXPENSES

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

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

RESULTS OF OPERATIONS

  The following table sets forth the percentages of patient revenues represented
by certain items reflected in the Company's Statements of Operations.  The
information that follows represents historical results of the Company and does
not include pre-acquisition results of the dental practices that the Company has
acquired. In March 1998, the Company acquired Dental World, Inc. a dental
practice management company located in Houston, Texas. In March 1998, the
Company acquired an 80.0% interest in Castle West, which was formed to acquire
Dental Consulting Services, LLC, a California-based dental practice management
company. In July 1998, the Company acquired Dentcor, Inc., a dental management
company, and five related dental practices in Florida. In August 1998, the
Company acquired all the outstanding stock of two dental practices in the Los
Angeles area and purchased the assets of a dental office in Houston.  In
December 1998, the Company acquired the assets of Crenshaw Family Dental in Los
Angeles and of Dental Centers of America, Inc., which managed 16 dental centers
in San Antonio, Austin and Dallas/Fort Worth, Texas. In January 2000, the
Company acquired the 20% minority interest in Castle West that it did not
previously own. (All of the acquisitions collectively referred to as the
"Completed Acquisitions").

                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                                                  1998             1999               2000
                                                                                 ------           ------             ------
<S>                                                                              <C>              <C>                <C>
Net patient revenues...........................................................  100.0%           100.0%             100.0%
Expenses:
 Dentist salaries and other professional costs.................................   24.7%            26.3%              26.8%
 Clinical salaries.............................................................   22.2%            20.8%              19.6%
 Dental supplies and laboratory fees...........................................    9.6%             9.4%              11.1%
 Rental and lease expense......................................................    5.5%             6.0%               7.2%
 Advertising and marketing.....................................................    3.7%             3.6%               3.6%
 Depreciation and amortization.................................................    4.7%             5.6%               6.4%
 Other operating expenses......................................................    5.9%             6.0%               6.9%
 Bad debt expense..............................................................    3.4%             4.1%              14.5%
 General and administrative....................................................   10.9%            10.6%              12.4%
 Asset impairment..............................................................     --               --                3.4%
                                                                                 -----            -----              -----
  Total expenses...............................................................   90.7%            92.4%             111.8%
                                                                                 -----            -----              -----
Operating income(loss).........................................................    9.3%             7.6%             -11.8%
Litigation settlement..........................................................     --              1.3%               1.4%
Interest expense...............................................................    2.6%             4.3%               7.3%
Other income...................................................................   -0.1%              --                 --
                                                                                 -----            -----              -----
Income(loss) before provision (benefit) for income taxes.......................    6.8%             2.0%             -20.5%
Provision (benefit) for income taxes...........................................    2.0%             0.8%              -2.4%
                                                                                 -----            -----              -----
Net income (loss)..............................................................    4.8%             1.2%             -18.0%
                                                                                 =====            =====              =====
</TABLE>

TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1999

  Net Patient Revenue - Net patient revenues of affiliated dental practices
increased from $102.7 million for the year ended December 31, 1999, to $106.0
million for the year ended December 31, 2000, an increase of $3.3 million or
3.2%. Approximately $5.4 million of the increase was attributable to the opening
of de novo dental centers in Texas, Florida and Tennessee.  Patient revenues for
dental centers open for more than one year increased approximately $1.2 million,
or 1.2%, offset by decreased revenues of approximately $3.3 million from dental
centers closed in the last year.

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

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

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

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

                                       18
<PAGE>

increased from 6.0% in 1999 to 6.5% for the comparable 2000 period. This
increase is attributable primarily to the addition of de novo dental centers.

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

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

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

  Bad Debt Expense - Bad debt expense increased from $4.2 million for the year
ended December 31, 1999 to $15.3 million for the year ended December 31, 2000,
including charges of $10.0 million to record additional allowance for doubtful
accounts receivable. The Company has changed its estimates for the
collectibility of certain categories of accounts receivable resulting in
additional charges of $7.9 million on billed accounts receivable and $2.1
million of unbilled accounts receivable from orthodontic patients. Lower
collection rates on patients with insurance, slower payments from insurance
companies, and higher than expected attrition of orthodontic patients accounted
for the change in estimates. Management is continuing to review and modify
credit and collection policies in order to reduce the level of accounts
receivable and to increase collection of past-due accounts. It is anticipated
that the change in estimates for the collection of accounts receivable will
result in lower rates of bad debt expense in future periods than incurred in
2000, as the collectibility of accounts receivable improves.

  General & Administrative Expense - General and administrative expenses
increased from $10.9 million for the year ended December 31, 1999, to $13.1
million for the year ended December 31, 2000, an increase of $2.2 million, or
20.3%. In the third and fourth quarters of 2000, the Company recorded costs of
$1.4 million including investment costs related to the investigation of
strategic alternatives, provisions for litigation and severance costs.
Excluding these costs, general and administrative expenses, expressed as a
percentage of net patient revenues, were 11.1% for the year ended December 31,
2000 compared to 10.6% for the prior year.

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

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

                                       19
<PAGE>

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

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

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

  Net Patient Revenues - Net patient revenues increased from $74.8 million for
the year ended December 31, 1998 to $102.7 million for the year ended December
31, 1999, an increase of $27.9 million or 37.3%. Approximately $21.2 million of
the increase was attributable to the acquisitions completed in 1998. Revenues
from de novo dental centers opened in 1998 and 1999 contributed $7.3 million of
the increase, accounting for 26.2% of the revenue increase from 1998. Patient
revenues from dental centers open for more than one year decreased from 1998.

  Dentist Salaries and Other Professional Costs -- Dentist salaries and other
professional costs increased from $18.5 million for the year ended December 31,
1998 to $27.0 million for the year ended December 31, 1999, an increase of $8.5
million or 45.7%. Expressed as a percentage of net patient revenues, dentist
salaries increased from 24.7% to 26.3% for the years ended December 31, 1998 and
1999, respectively, reflecting higher compensation paid to dentists and the
impact of new dental center openings in 1998 and 1999.

  Clinical Salaries -- Clinical salaries increased from $16.6 million for the
year ended December 31, 1998 to $21.4 million for the year ended December 31,
1999, an increase of $4.8 million or 28.9%. The Completed Acquisitions accounted
for $4.3 million of the increase and the de novo centers accounted for $1.4
million. Clinical salaries in dental centers open for more than one year
decreased by $0.9 million. Expressed as a percentage of patient revenues,
clinical salaries decreased from 22.2% to 20.8% for the years ended December 31,
1998 and 1999, respectively, primarily due to productivity improvements.

  Dental Supplies and Laboratory Fees -- Dental supplies and laboratory fees
increased from $7.2 million for the year ended December 31, 1998 to $9.6 million
for the year ended December 31, 1999, an increase of $2.4 million or 34.0%. This
increase resulted primarily from the Completed Acquisitions, which incurred $2.1
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees decreased from 9.6% in
1998 to 9.4% in 1999.

  Rental and Lease Expense -- Rental and lease expense increased from $4.1
million for the year ended December 31, 1998 to $6.2 million for the year ended
December 31, 1999, an increase of $2.1 million or 51.6%. Rental expense from the
29 dental centers opened in 1998 and 1999 accounted for $0.8 million of the
increase and the Completed Acquisitions in Florida, California, and Texas
accounted for $1.1. Expressed as a percentage of patient revenues, rental and
lease expense increased from 5.5% in 1998 to 6.0% in 1999 due primarily to
higher relative lease expense at the de novo centers.

  Advertising and Marketing -- Advertising and marketing expense increased from
$2.8 million for the year ended December 31, 1998 to $3.7 million for the year
ended December 31, 1999, an increase of 32.1%. Expressed as a percentage of
patient revenues, advertising and marketing costs decreased from 3.7% in 1998 to
3.6% in 1999, as advertising expenses in established markets were favorably
leveraged over additional dental centers opened in 1998 and 1999.

                                       20
<PAGE>

  Depreciation and Amortization -- Depreciation and amortization increased from
$3.5 million for the year ended December 31, 1998 to $5.8 million for the year
ended December 31, 1999, an increase of $2.3 million or 63.8%, primarily
resulting from higher depreciation and amortization of management services
agreements and other intangibles related to the Completed Acquisitions. As a
percentage of patient revenues, depreciation and amortization increased from
4.7% to 5.6% for the years ended December 31, 1998 and 1999, respectively.

  Other Operating and Bad Debt Expenses -- Other operating and bad debt expenses
increased from $7.0 million for the year ended December 31, 1998 to $10.3
million for the year ended December 31, 1999, an increase of approximately $3.3
million or 47.8%. Other operating expenses include expenses related to the
operation of the Company's dental centers, such as utilities, taxes and
management information systems, and bad debt expense incurred in the financing
of patient receivables at the affiliated dental practices. The increase from
1998 to 1999 resulted from higher bad debt expense and operating expenses at the
de novo dental centers and the Completed Acquisitions. The increase in bad debt
expense from $2.5 million, or 3.4% of revenues, in 1998 to $4.2 million, or 4.1%
of revenues, in 1999 resulted from higher levels of patient receivables.
Expressed as a percentage of revenues, other operating and bad debt expenses
increased from 9.3% in 1998 to 10.1% in 1999, primarily due to the higher
provision for bad debts.

  General & Administrative Expense -- General and administrative expenses
increased from $8.1 million for the year ended December 31, 1998 to $10.9
million for the year ended December 31, 1999, an increase of $2.8 million or
33.9%. The increase resulted from the addition of general and administrative
expenses of the Completed Acquisitions, the centralization of certain functions
formerly performed at a clinical level, and increased personnel and general
corporate expenses at the Company's headquarters in Houston. Expressed as a
percentage of patient revenues, general and administrative expense, however,
decreased from 10.9% to 10.6% for years ended December 31, 1998 and 1999,
respectively, due to relatively greater percentage increase in the Company's
patient revenues.

  Litigation Settlement -- In August 1998, the former owner of certain dental
practices acquired by the Company in August 1996, filed a lawsuit against the
Company.  The lawsuit alleged that the Company committed various acts of fraud,
securities fraud, conspiracy, breach of contract and misrepresentation
concerning the value of the Company's common stock issued in the acquisition of
the dental practices.  In August 1999, the Company settled the lawsuit and
recorded a charge of $1.4 million.

  Interest Expense -- Interest expense increased from $2.0 million for the year
ended December 31, 1998 to $4.4 million for the year ended December 31, 1999
primarily resulting from higher bank borrowings. Bank borrowings increased from
$39.4 million at December 31, 1998 to $50.9 million at December 31, 1999.

  Income Taxes -- For the year ended December 31, 1998, the Company recorded a
provision for income taxes of $1.5 million resulting from income before income
taxes of $5.1 million. For the year ended December 31, 1999, the Company
recorded a provision for income taxes of $0.8 million resulting from the income
before income taxes of $2.0 million. The Company's average tax rate for 1998 was
29.4%, compared to an average tax rate of 41.1% in 1999. A portion of the
litigation settlement was non-deductible for income tax purposes, resulting in
the higher average rate. In addition, during 1998, the Company continued to
realize benefits from net operating loss carry forwards and other tax deductions
not recognized in prior years.

LIQUIDITY AND CAPITAL RESOURCES

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

  At December 31, 2000 the Company had a net working capital deficit of $62.3
million, resulting primarily from the classification as a current liability of
$45.2 million of outstanding borrowings under the Company's senior bank credit
facility, $15.0 million in senior subordinated note and convertible note
agreements (see below) and $2.9 million in other subordinated notes. Current
assets consisted of cash and cash equivalents of $0.9 million, billed and
unbilled accounts receivable of $8.9 million and $1.9 million of prepaid
expenses and

                                       21
<PAGE>

other current assets. Current liabilities totaled $76.9 million, consisting of
$13.1 million in accounts payable and accrued liabilities, $63.7 million in
current maturities of long-term debt and $0.1 million of deferred compensation
payable to a stockholder.

  For the year ended December 31, 2000, cash provided by operating activities
was approximately $3.5 million compared to cash used in operating activities of
$0.9 million in 1999. In 1999, cash used in investing activities amounted to
$10.4, primarily for the construction and equipping of new dental centers. For
the year ended December 31, 2000, cash used in investing activities was $8.3
million, consisting of $5.0 million to acquire the 20% minority interest in the
Company's California subsidiary and $3.3 million for capital expenditures. For
the year ended December 31, 1999, cash provided by financing activities totaled
$10.6 million, primarily reflecting proceeds from bank borrowings of $11.5
million partially offset by $1.5 million in repayments of long-term debt. For
the year ended December 31, 2000, cash provided by financing activities totaled
$5.7 million representing $16.9 million in proceeds from long-term debt offset
partially by $9.1 million in repayments of long-term debt and capital lease
obligations, payment of $1.3 million in debt issuance costs and $0.8 million
reduction in bank overdrafts.

  During 2000, the Company's principal sources of liquidity consisted primarily
of cash and cash equivalents and borrowings under the Company's bank credit
facility.  In January 2000, the Company amended its Credit Agreement with its
existing banks and entered into a senior subordinated note agreement
("Subordinated Note Agreement") and a subordinated convertible note agreement
("Convertible Note Agreement") with two lenders. In May 2000, the Company
amended its Credit Agreement to provide additional availability for the Company
to complete the de novo dental centers that were under development for 2000. In
August 2000, the Company advised its lenders that it was in violation of certain
financial covenants of the Credit Agreement, the Subordinated Note Agreement and
the Convertible Note Agreement as a result of losses incurred in the second
quarter of 2000 (collectively "Debt Agreements").

  The Credit Agreement provides for borrowings up to $55.0 million and matures
November 2002. Advances under the Credit Agreement require quarterly interest
payments through March 2001 at which time principal becomes payable quarterly
based on a five-year amortization with final payment at maturity. Borrowings
under the Credit Agreement may at no time exceed a specified borrowing base,
which is calculated as a multiple of the Company's earnings before interest,
income taxes, depreciation and amortization ("EBITDA"), as adjusted. The Credit
Agreement bears interest at variable rates, which are based upon either the
bank's base rate or LIBOR, plus, in either case, a margin which varies according
to the ratio of the Company's funded debt to the EBITDA, each as defined in the
Credit Agreement. A commitment fee is payable quarterly at rates ranging from
0.125 percent to 0.5 percent of the unused amounts for such quarter. The Credit
Agreement contains affirmative and negative covenants that require the Company
to maintain certain financial ratios, limit the amount of additional
indebtedness, limit the creation or existence of liens, set certain restrictions
on acquisitions, mergers and sales of assets and restrict the payment of
dividends. In addition, under the May 2000 amended Credit Agreement, capital
expenditures for 2000 were limited to no more than $3.5 million, further
acquisitions are not permitted in 2000, and the payment of any litigation
settlement was restricted to no more than $100,000, without consent of the
lenders. At December 31, 2000, $45.2 million was outstanding under the Credit
Agreement.

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

                                       22
<PAGE>

restrictions on acquisitions, mergers and sales of assets and restrict the
payment of dividends. At December 31, 2000, the Company was not in compliance
with the financial covenants of the Subordinated Note Agreement and Convertible
Note Agreement. In addition, the Company has not made $1.9 million in principal
and interest payments due to the subordinated note holders in October 2000 and
January 2001, because it is restricted from making such payments as long as the
Company is in default under the Credit Agreement.

  As a result of additional losses incurred in the third and fourth quarters of
2000, the Company has not been in compliance with the financial covenants of the
Debt Agreements since June 30, 2000. At December 31, 2000, approximately $45.2
million in senior debt and $15.0 million in subordinated debt were outstanding
under the Debt Agreements in addition to approximately $3.5 million in other
outstanding subordinated debt. Since the Company is in default under these
agreements, all amounts outstanding are subject to acceleration and have been
classified as current liabilities. On February 15, 2001, the Company retained
Getzler and Co., a New York based turnaround specialist, to assist the Company
in addressing its operational issues and restructuring of the Company's debt.
The Company's board of directors has appointed Getzler's designee, Ira Glazer,
to serve as the Company's acting Chief Executive Officer and initiated an
executive search for a permanent Chief Executive Officer. Jack Castle, Jr., the
Company's former Chief Executive Officer, continues to serve as the Company's
Chairman of the Board. The Company's President and Chief Operating Officer
resigned to pursue other opportunities.

  The Company has continued to pay interest (other than default interest) on the
amounts outstanding under the Credit Agreement, but has not made principal or
interest payments due to subordinated creditors since July 2000. The Company has
requested waivers of these covenant violations and a forbearance of scheduled
principal payments and is negotiating with its lenders to restructure the Debt
Agreements. However, these negotiations have not resulted in a forbearance
agreement or waivers of the defaults as of April 16, 2001. Given the financial
position of the Company and the current condition of financial markets, the
Company believes that it is unlikely that either a new lender group will be
brought in to replace the existing lender group or that an equity investment by
a third party in the Company will be obtained that would be sufficient to
satisfy its capital needs.

  The Company believes that it will be able to continue to make interest
payments, exclusive of default interest, on its outstanding debt, but was not
able to make scheduled principal payments on its senior debt, which began
becoming due in March 2001. There can be no assurance that the Company's lenders
will consent to the waivers and restructuring necessary to allow the Company to
continue to operate. If the Company and its lenders cannot reach an agreement,
it may be necessary for the Company to seek protection under Chapter 11 of the
Bankruptcy Code.

  The Company has developed a plan that will allow it to continue to operate
without the need for additional borrowings and to make principal payments to its
senior bank creditors out of available funds. Components of this plan include:
(i) reorganization of field management to improve efficiency and reduce regional
overhead costs; (ii) reduction in corporate general and administrative costs
through job eliminations and reduction in other overhead expenses; (iii) closing
of unprofitable and under-performing dental centers; (iv) realignment of
accounts receivable management to focus on improved collection of insurance and
patient receivables; (v) restructuring of compensation for management to
emphasize performance-based incentives; and, (vi) cancellation of further de
novo development and reducing capital expenditures to maintenance levels of
approximately $1.2 million for 2001.

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

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

                                       23
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The Company's financial instruments with market risk exposure are revolving
credit borrowings under its Debt Agreements which total $60.2 million at
December 31, 2000. Based on this balance, a change of one percent in the
interest rate would cause a change in interest expense of approximately
$602,000, or $0.09 per share, on an annual basis. The bank credit facility was
not entered into for trading purposes and carries interest at a pre-agreed upon
percentage point spread from either the prime interest rate or Eurodollar
interest rate.

  As of December 31, 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%. For 2000, the
weighted-average variable rate, based upon a three-month LIBOR rate, was 6.78%.
The weighted-average variable rates are subject to change over time as LIBOR
fluctuates. During 2000, the Company was required to pay $52,000 in payments
under the swap agreement. The term of the swap agreement expires July 20, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

  None.

                                       24
<PAGE>

                               PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 2000. Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

  The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 2000. Such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 2000. Such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 2000. Such information is incorporated herein by reference.

                                       25
<PAGE>

PART IV

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

  (a) (1) Financial Statements

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

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>                                                                                            <C>
Report of Independent Accountants.............................................................  F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000..................................  F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998,
 1999 and 2000................................................................................  F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
 December 31, 1998, 1999 and 2000.............................................................  F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
 1999 and 2000................................................................................  F-6
Notes to Financial Statements.................................................................  F-7
</TABLE>

  (a) (2) Financial Statement Schedules

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

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>                                                                                            <C>
Report of Independent Accountants on Financial Statement Schedule.............................  S-1

Financial Statement Schedule

 II -- Valuation and Qualifying Accounts......................................................  S-2
</TABLE>

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

  (a) (3) Exhibits

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

(b) Reports on Form 8-K

    NONE

                                       26
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas on April 18, 2001.

                                        CASTLE DENTAL CENTERS, INC.

                                         By:    /s/ IRA GLAZER
                                            --------------------------------
                                                    IRA GLAZER
                                                 Chief Executive Officer



                          POWER OF ATTORNEY

  We, the undersigned, directors and officers of Castle Dental Centers, Inc.
(the "Company"), do hereby severally constitute and appoint Ira Glazer and John
M. Slack 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,
2000, 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.

<TABLE>
<CAPTION>
                             SIGNATURE                             TITLE                       DATE
                             ---------                             -----                       ----
<S>                                                <C>                                       <C>
        /s/  JACK H. CASTLE, JR.                   Chairman of the Board                     April 18, 2001
--------------------------------------------
             JACK H. CASTLE, JR.

             /s/ IRA GLAZER                        Chief Executive Officer                   April 18, 2001
--------------------------------------------
                 IRA GLAZER

           /s/ JOHN M. SLACK                       Vice President -- Chief Financial         April 18, 2001
--------------------------------------------
               JOHN M. SLACK                       Officer (Principal Financial and
                                                   Accounting Officer)

        /s/ JACK H. CASTLE, D.D.S.                 Director                                  April 18, 2001
--------------------------------------------
           JACK H. CASTLE, D.D.S.

        /s/    G. KENT KAHLE                       Director                                  April 18, 2001
--------------------------------------------
               G. KENT KAHLE

        /s/   ROBERT J. CRESCI                     Director                                  April 18, 2001
--------------------------------------------
              ROBERT J. CRESCI

        /s/   EMMETT E. MOORE                      Director                                  April 18, 2001
--------------------------------------------
              EMMETT E. MOORE
</TABLE>

                                       27
<PAGE>

                                     CASTLE DENTAL CENTERS, INC.
                                   INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                       PAGE
                                                                                                       ----
<S>                                                                                                  <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants...................................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000........................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000............. F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
  December 31, 1998, 1999 and 2000..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000............. F-6
Notes to Financial Statements.......................................................................... F-7

</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

  In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Castle Dental
Centers, Inc. at December 31, 1999 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.

   We believe that our audits provide a reasonable basis for our opinion. The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, negative
working capital, and defaults under the Company's senior and subordinated debt
agreements. In addition, at December 31, 2000, the Company had $63.7 million of
notes payable that were either due on or before March 31, 2001 or subject to
acceleration. The Company was not able to make scheduled principal payments on
these notes at March 31, 2001. Management's plans concerning these matters are
also discussed in Note 1. The uncertainties associated with these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include adjustments that might
result from the outcome of this uncertainty.


                                             PricewaterhouseCoopers LLP

April 16, 2001
Houston, Texas
                                      F-2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   --------------------------
                                                                                      1999          2000
                                                                                   ----------    ------------
                                ASSETS
<S>                             <C>                                                       <C>            <C>
Current assets:
 Cash and cash equivalents......................................................   $       59    $        901
 Patient receivables, net of allowance for uncollectible accounts of
  $13,588 and $12,041 in 1999 and 2000, respectively............................       16,928           8,912
 Unbilled patient receivables, net of allowance for uncollectible accounts of
  $904 and $738 in 1999 and 2000, respectively..................................        4,667           2,952
 Prepaid expenses and other current assets......................................        4,199           1,894
 Deferred income taxes..........................................................        2,488               -
                                                                                   ----------    ------------
    Total current assets........................................................       28,341          14,659
                                                                                   ----------    ------------
 Property and equipment, net....................................................       20,361          18,079
 Intangibles, net...............................................................       64,020          60,248
 Other assets...................................................................        2,260           2,400
                                                                                   ----------    ------------
    Total assets................................................................   $  114,982    $     95,386
                                                                                   ==========    ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Current portion of long-term debt..............................................   $    2,192    $     63,679
 Accounts payable and accrued liabilities.......................................        9,855          13,107
 Deferred compensation payable, related party...................................          526             132
                                                                                   ----------    ------------
    Total current liabilities...................................................       12,573          76,918
                                                                                   ----------    ------------
Long-term debt, net of current portion..........................................       53,996             429
Deferred income taxes...........................................................        6,896               -
Minority interest...............................................................        4,354               -
Commitments and contingencies
Stockholders' equity:
 Common stock, $.001 par value, 19,000,000 and 30,000,000 shares authorized,
 in 1999 and 2000, 6,417,206 shares issued and outstanding......................            6               6
 Additional paid-in capital.....................................................       42,086          42,086
 Accumulated deficit............................................................       (4,929)        (24,053)
                                                                                   ----------    ------------
    Total stockholders' equity..................................................       37,163          18,039
                                                                                   ----------    ------------
    Total liabilities and stockholders' equity..................................   $  114,982    $     95,386
                                                                                   ==========    ============
</TABLE>

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

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                   -----------------------------------
                                                                      1998          1999       2000
                                                                   ----------    ---------   ---------
<S>                                                                <C>           <C>        <C> <C>
Net patient revenues...........................................    $   74,823    $ 102,701   $ 106,023
Expenses:
 Dentist salaries and other professional costs.................        18,516       26,984      28,384
 Clinical salaries.............................................        16,612       21,408      20,795
 Dental supplies and laboratory fees...........................         7,197        9,641      11,730
 Rental and lease expense......................................         4,091        6,203       7,608
 Advertising and marketing.....................................         2,763        3,650       3,847
 Depreciation and amortization.................................         3,535        5,792       6,796
 Other operating expenses......................................         4,431        6,154       7,344
 Bad debt expense..............................................         2,545        4,160      15,325
 General and administrative....................................         8,145       10,909      13,128
 Asset impairment..............................................             -            -       3,567
                                                                   ----------    ---------   ---------
  Total expenses...............................................        67,835       94,901     118,524
                                                                   ----------    ---------   ---------
Operating income (loss)........................................         6,988        7,800     (12,501)
Litigation settlement..........................................             -        1,366       1,495
Interest expense...............................................         1,969        4,369       7,751
Other (income) expense.........................................           (57)          34         (28)
                                                                   ----------    ---------   ---------
Income (loss) before provision (benefit) for income taxes......         5,076        2,031     (21,719)
Provision (benefit) for income taxes...........................         1,490          835      (2,595)
                                                                   ----------    ---------   ---------
Net income (loss)..............................................    $    3,586    $   1,196   $ (19,124)
                                                                   ==========    =========   =========
Income (loss) per common share:
 Basic and diluted:                                                $     0.54    $    0.18   $   (2.96)
                                                                   ==========    =========   =========
Weighted average number of common and
common equivalent shares outstanding
 Basic.........................................................         6,586        6,825       6,451
                                                                   ==========    =========   =========
 Diluted.......................................................         6,608        6,850       6,451
                                                                   ==========    =========   =========
</TABLE>

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

                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>
                                                    Common Stock           Additional
                                               ----------------------       Paid-in       Accumulated    Stockholders'
                                                  Shares     Amount         Capital         Deficit          Equity
                                               ----------   ---------      ----------     -----------    -------------
<S>                                             <C>         <C>         <C>                       <C>       <C>
Balance, January 1, 1998.....................   6,229,239    $      6      $   40,818     $   (9,711)     $     31,113
 Issuance of common stock in
    connection with acquisitions.............     187,967           -           1,698              -             1,698
 Net income..................................           -           -               -          3,586             3,586
                                               ----------   ---------      ----------     -----------    -------------
Balance, December 31, 1998...................   6,417,206           6          42,516         (6,125)           36,397
 Exchange of consideration for
  acquisition................................           -           -            (430)             -              (430)
 Net income..................................           -           -               -          1,196             1,196
                                               ----------   ---------      ----------     -----------    -------------
Balance, December 31, 1999...................   6,417,206           6          42,086         (4,929)           37,163
 Net loss....................................           -           -               -        (19,124)          (19,124)
                                               ----------   ---------      ----------     -----------    -------------
Balance, December 31, 2000...................   6,417,206    $      6      $   42,086     $  (24,053)     $     18,039
                                               ===========  =========      ==========     ===========    =============
</TABLE>

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

                                      F-5
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                          ----------------------------------------
                                                                              1998          1999          2000
                                                                          -----------    ----------    -----------
<S>                                                                       <C>            <C>          <C>
Cash flows from operating activities:
Net income (loss)...................................................      $     3,586    $   1,196    $   (19,124)
 Adjustments:
  Provisions for bad debts..........................................            2,545        4,160         15,325
  Depreciation and amortization.....................................            3,535        5,792          6,796
  Amortization of loan cost.........................................               80          149            412
  Minority interest.................................................                -           51              -
  Deferred income taxes.............................................            1,568          816         (3,133)
  Asset impairment..................................................                -            -          3,567
  Changes in operating assets and liabilities:
    Patient receivables.............................................           (5,864)     (10,142)        (5,141)
    Unbilled patient receivables....................................             (615)      (1,662)          (453)
    Prepaid expenses and other current assets.......................           (1,957)      (1,293)         1,971
    Other assets....................................................              (45)      (1,372)          (315)
    Accounts payable and accrued liabilities........................             (278)       1,931          3,970
    Deferred compensation payments, related party...................             (657)        (526)          (394)
                                                                          -----------    ---------    -----------
     Net cash provided by (used in) operating activities............            1,898         (900)         3,481
                                                                          -----------    ---------    -----------
Cash flows used in investing activities:
 Capital expenditures...............................................           (6,660)      (9,503)        (3,304)
 Acquisition of affiliated dental practices, net of cash acquired ..          (30,818)        (667)        (5,038)
 Non-competition agreements.........................................                -         (205)             -
                                                                          -----------    ---------    -----------
     Net cash used in investing activities..........................          (37,478)     (10,375)        (8,342)
                                                                          -----------    ---------    -----------

Cash flows from financing activities:
 Proceeds from debt.................................................           37,000       11,460         16,870
 Repayment of debt..................................................           (3,341)      (1,478)        (9,066)
 Bank overdraft.....................................................                -          818           (818)
 Debt issuance costs................................................             (292)        (161)        (1,283)
                                                                          -----------    ---------    -----------
     Net cash provided by financing activities......................           33,367       10,639          5,703
                                                                          -----------    ---------    -----------

Net change in cash and cash equivalents.............................           (2,213)        (636)           842
Cash and cash equivalents, beginning of period......................            2,908          695             59
                                                                          -----------    ---------    -----------
Cash and cash equivalents, end of period............................      $       695    $      59    $       901
                                                                          ===========    =========    ============
</TABLE>

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

                                      F-6
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

GOING CONCERN BASIS

  The accompanying financial statements of the Company have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred net losses of $19.1 million in 2000 and, as a result, has not been in
compliance with the financial covenants of its Debt Agreements since June 30,
2000. At December 31, 2000, approximately $45.2 million in senior debt and $15.0
million in subordinated debt were outstanding under the Debt Agreements in
addition to approximately $3.5 million in other outstanding subordinated debt.
Since the Company is in default under these agreements, all amounts outstanding
are subject to acceleration and have been classified as current liabilities. The
Company has continued to pay interest (other than default interest) on the
amounts outstanding under the Credit Agreement, but has not made principal or
interest payments of $1.9 million owed to subordinated creditors since July
2000. The Company has requested waivers of these covenant violations and a
forbearance of scheduled principal payments and is negotiating with its lenders
to restructure the debt agreements. However, these negotiations have not
resulted in a forbearance agreement or waivers of the defaults as of April 16,
2001. Given the financial position of the Company and the current condition of
financial markets, the Company believes that it is unlikely that either a new
lender group will be brought in to replace the existing lender group or that an
equity investment by a third party in the Company will be obtained that would be
sufficient to satisfy its capital needs.

  The Company has developed a plan that will allow it to continue to operate
without the need for additional borrowings and to make principal payments to its
senior bank creditors out of available funds. Components of this plan include:
(i) reorganization of field management to improve efficiency and reduce regional
overhead costs; (ii) reduction in corporate general and administrative costs
through job eliminations and reduction in other overhead expenses; (iii) closing
of unprofitable and under-performing dental centers; (iv) realignment of
accounts receivable management to focus on improved collection of insurance and
patient receivables; (v) restructuring of compensation for management to
emphasize performance-based incentives; and, (vi) cancellation of further de
novo development and reducing capital expenditures to maintenance levels of
approximately $1.2 million for 2001.

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

  Corporate Organization and Basis of Presentation

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

  The consolidated financial statements include the accounts of the Company and
all wholly-owned and beneficially-owned subsidiaries and the accounts of
affiliated dental practices in which the Company has a long-term controlling
financial interest. Because of corporate practice of medicine laws in the states
in which 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, in its sole discretion and at any time, the licensed dentist who is
the majority shareholder of the capital stock of the

                                      F-7
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

professional corporation at a nominal cost ("nominee arrangements").  At
December 31, 2000, 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 to forty 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
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 patient
revenues; and, (iii) a performance fee equal to the patient revenues of the
affiliated dental practice less (a) the expenses of the affiliated dental
practice and (b) the sum of (i) and (ii), as described in 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 practice
and (ii) a management fee in an amount ranging from 15.0% to 30.0% of net
patient revenues.  With respect to certain professional corporations in
California, the Company is paid a bonus equal to 30% of patient revenues in
excess 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.

  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," must consolidate the results of the
affiliated practices with those of the Company. Net patient revenues are
presented in the accompanying statement of operations because the Company must
present consolidated financial statements. All significant intercompany accounts
and transactions, including management fees, have been eliminated in
consolidation.

  Revenue Recognition

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

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

                                      F-8
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

impact on the Company. Fees from capitated contracts totaled $5.1 million, $7.4
million and $9.1 million in 1998, 1999 and 2000, respectively, excluding
supplemental payments and co-payments by members. No single contract amounted to
a significant portion of the Company's revenues, as each of the Company's
regional operations contracts separately with managed care providers. The
Company periodically evaluates its capitated managed care contracts by comparing
the average reimbursement per procedure plus the total capitation fees per
contract to the usual and customary fees charged by the affiliated dental
practice.

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

  Cash and Cash Equivalents

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

  Property and Equipment

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

  Useful lives for property and equipment are as follows:

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


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

  Intangible Assets

  The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 2000 are 25 years.

  In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and non-compete agreements with the dentist, or directly
contract with payors, the intangible asset created in the purchase allocation
process is associated primarily with the management services agreement with the
affiliated dental practice.

  The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amount of the asset
may not be recoverable, as determined based on the undiscounted cash flows of
the related

                                      F-9
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

operations over the remaining amortization period, the carrying value of the
asset is reduced to estimated fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each affiliated dental
practice's relative market share and local market competitive environment,
current period and forecasted operating results and cash flows of the affiliated
dental practice and its impact on the management fee earned by the Company, and
legal factors governing the practice of dentistry.

  Other Assets

  Other assets consist primarily of debt issuance costs and other receivables.
The costs related to the issuance of debt are capitalized and amortized into
interest expense using the straight-line method, which approximates the interest
method, over the term of the related debt. Accumulated amortization was $238,000
and $650,000 as of December 31, 1999 and 2000, respectively.  Other receivables
included $238,000 and $67,500 at December 31, 1999 and 2000, respectively, in
loans made to executive officers (see Note 12).

  Income Taxes

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

  Advertising

  Costs incurred for advertising are expensed when incurred.

  Use of Estimates in the Preparation of Financial Statements

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

  Recent Accounting Pronouncements

  During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," deferred the
implementation of SFAS 133 until the fiscal year ending December 31, 2001. The
Company implemented SFAS 133 effective January 1, 2001. Due to our limited use
of derivative instruments, the impact of adopting SFAS No. 133 will not be
material to our financial statements.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".  SAB
No. 101, as amended was implemented in the fourth quarter of 2000 and did not
have a material effect on our consolidated financial position, results of
operations or cash flows.

                                      F-10
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

2. SELECTED BALANCE SHEET INFORMATION

   The details of certain balance accounts were as follows.

                                                            December 31,
                                                      ------------------------
                                                        1999           2000
                                                      ---------     ----------
                                                           (in thousands)
Property and equipment:
  Equipment.........................................  $  13,644     $   16,362
  Leasehold improvements............................      9,265         10,399
  Furniture and fixtures............................      2,009          2,498
  Vehicles..........................................        132            132
  Construction-in-progress..........................      3,213              -
                                                      ---------     ----------
      Total property and equipment..................     28,263         29,391
  Less accumulated depreciation.....................      7,902         11,312
                                                      ---------     ----------
      Property and equipment, net...................  $  20,361     $   18,079
                                                      =========     ==========

  Depreciation expense was approximately $1.8 million, $3.0 million and $4.0
million for the years ended December 31, 1998, 1999 and 2000, respectively.
Capitalized interest cost was $329,000 for the year ended December 31, 1999.
There were no amounts capitalized during 1998 and 2000.  Fully depreciated
assets in use as of December 31, 1999 and 2000 were approximately $1.3 million
and $2.5 million, respectively.

                                                            December 31,
                                                      ------------------------
                                                        1999           2000
                                                      ---------     ----------
                                                           (in thousands)
Intangible assets:
  Management services agreements....................  $  69,251     $   68,213
  Other.............................................        355            355
                                                      ---------     ----------
      Total intangible assets.......................     69,606         68,568
  Less accumulated amortization.....................      5,586          8,320
                                                      ---------     ----------
      Intangible assets, net........................  $  64,020     $   60,248
                                                      =========     ==========

  Amortization expense was approximately $1.8 million, $2.8 million and $2.8
million for the years ended December 31, 1998, 1999 and 2000, respectively.

                                                            December 31,
                                                      ------------------------
                                                        1999           2000
                                                      ---------     ----------
                                                           (in thousands)
  Accounts payable and accrued liabilities:
    Bank overdraft................................... $     818     $        -
    Trade............................................     3,792          2,587
    Salaries, wages and payroll taxes................     2,021          2,646
    Due to patients..................................     1,772          2,543
    Legal............................................       991          1,487
    Interest.........................................       385          3,068
    Other............................................        76            776
                                                      ---------     ----------
      Total accounts payable and accrued liabilities. $   9,855     $   13,107
                                                      =========    ===========

                                      F-11
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

3. ACQUISITIONS:

  In January 2000, the Company entered into a settlement agreement with Dental
Consulting Services, LLC ("DCS"), a 20% shareholder in the Castle Dental Centers
of California, LLC. Pursuant to the terms of the settlement agreement, the
Company acquired the 20% minority interest and a conversion right held by DCS.
Total consideration paid by the Company was $5.3 million of which $300,000 was
paid in November 1999 as a deposit.

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

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

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

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                             ------------------------------------
                                                                                1998        1999          2000
                                                                             ----------  ----------    ----------
<S>                                                                          <C>         <C>           <C>
Patient receivables, net..................................................   $   1,470   $        -    $        -
Unbilled patient receivables, net.........................................         188            -             -
Prepaid expenses and other current assets.................................          92            -          (334)
Property and equipment, net...............................................       3,866            -            15
Other assets..............................................................          93            -          (305)
Management services agreements............................................      42,072          667           274
Accounts payable and accrued liabilities..................................      (2,019)           -          (100)
Deferred taxes............................................................      (3,149)           -         1,275
Long-term debt, assumed...................................................      (1,254)           -             -
Minority interest.........................................................      (4,305)           -         4,354
                                                                             ---------   ----------    ----------
                                                                                37,054          667         5,179
Less: fair value of common stock issued and other equity instruments......       1,698            -             -
Less: issuance of notes payable...........................................       4,538            -           141
                                                                             ---------   ----------    ----------
 Cash purchase price, net of cash acquired................................   $  30,818   $      667    $    5,038
                                                                             ==========  ==========    ==========
</TABLE>

  Unaudited pro forma combined results of operations for the year ended December
31, 1998, assuming all acquisitions occurred at the beginning of the year, are
as follows:

                                                          1998
                                                         ------
                                                     (in thousands)
Net patient revenues............................        $93,473
Net income .....................................          3,918
Income per common share:
  Basic.........................................           0.58
  Diluted.......................................           0.57

  The unaudited pro forma summary is not necessarily indicative either of
results of operations that would have occurred had the acquisitions been made at
the beginning of the period presented, or of future results of operations of the
combined companies.

4.   LONG-TERM DEBT:

Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                             ------------------------
                                                                                1999          2000
                                                                             ----------    ----------
                                                                                 (in thousands)
<S>                                                                         <C>               <C>
 Revolving credit loans....................................................  $   50,860    $   45,230
 Senior subordinated notes.................................................           -        13,622
 Senior subordinated convertible notes.....................................           -         1,378
 Subordinated seller notes.................................................       4,393         3,414
 Other notes payable.......................................................         935           464
                                                                             ----------    ----------
  Total debt...............................................................      56,188        64,108
 Less current portion......................................................       2,192        63,679
                                                                             ----------    ----------
  Long-term debt...........................................................  $   53,996    $      429
                                                                             ==========    ==========
</TABLE>

                                      F-12
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

  In December 1998, the Company entered into a credit agreement with a bank
group (the "Credit Agreement") that provides for borrowings up to $55.0 million
and matures in November 2002. Advances under the Credit Agreement require
quarterly interest payments through March 2001 at which time principal becomes
payable quarterly based on a five-year amortization with final payment at
maturity. Borrowings under the Credit Agreement may at no time exceed a
specified borrowing base, which is calculated as a multiple of the Company's
earnings before interest, income taxes, depreciation and amortization
("EBITDA"), as adjusted. The bank credit facility bears interest at variable
rates, which are based upon either the bank's base rate or LIBOR, plus, in
either case, a margin which varies according to the ratio of the Company's
funded debt to the EBITDA, each as defined in the Credit Agreement. A commitment
fee is payable quarterly at rates ranging from 0.125 percent to 0.5 percent of
the unused amounts for such quarter. The Credit Agreement contains affirmative
and negative covenants that require the Company to maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends. At December 31, 2000, $45.2
million was outstanding under the Credit Agreement and the average interest rate
on the Company's bank borrowings was 13.7%, including default interest of 2.0%.

  In January 2000, the Company amended the Credit Agreement and entered into a
senior subordinated note agreement ("Subordinated Note Agreement") and a
subordinated convertible note agreement ("Convertible Note Agreement") with two
lenders. The Subordinated Note Agreement and Convertible Note Agreement provide
for borrowings of $13.7 million and $1.3 million, respectively.  Loans under the
Subordinated Note Agreement bear interest at the 90-day LIBOR rate plus five and
one-half percent, payable quarterly, and are due in eight quarterly installments
beginning in the sixty-third month following the closing date.  Loans under the
Convertible Note Agreement bear interest at the same rate as loans under the
Subordinated Note Agreement and are due on demand beginning seven years after
the closing date with a final maturity date of January 30, 2009. The convertible
note is convertible at any time into 442,880 shares of Company common stock at
the request of the holders at a fixed conversion price of $3.1125 per share. The
Subordinated Note Agreement and Convertible Note Agreement contain affirmative
and negative covenants that require that the Company maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends. At December 31, 2000, the
Company was not in compliance with the financial covenants of the Subordinated
Note Agreement and Convertible Note Agreement.  In addition, the Company has not
made $1.9 million in principal and interest payments due to the subordinated
note holders in October 2000 and January 2001, because it is restricted from
making such payments as long as the Company is in default of the Credit
Agreement.

   In March 2000, the Company advised its lenders that it was in violation of
certain financial covenants of the Credit Agreement.  Accordingly, in May 2000,
the Company amended the credit facility to cure the covenant violations and to
provide additional borrowing availability. As a result of the losses incurred in
third and fourth quarters of 2000, the Company has not been in compliance with
the financial covenants of the Debt Agreements since June 30, 2000. At December
31, 2000, approximately $45.2 million in senior debt and $15.0 million in
subordinated debt were outstanding under the Debt Agreements in addition to
approximately $3.5 million in other outstanding subordinated debt. In addition,
the Company was not able to make scheduled principal payments under the Credit
Agreement in March 2001. Since the Company is in default under these agreements,
all amounts outstanding are subject to acceleration and have been classified as
current liabilities. The Company has requested waivers of these covenant
violations and a forbearance of scheduled principal payments and is negotiating
with its lenders to restructure the Debt Agreements. However, these negotiations
have not resulted in a forbearance agreement or waivers of the defaults as of
April 16, 2001. There can be no assurance that the Company's lenders will
consent to the waivers and restructuring necessary to allow the Company to
continue to operate. If the Company and the lenders cannot reach an agreement,
it may be necessary for the Company to seek protection under Chapter 11 of the
Bankruptcy Code.

  At December 31, 2000, approximately $1.4 million (net of accumulated
amortization of approximately

                                      F-13
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

$0.6 million) of debt issuance costs had been capitalized in connection with the
issuance of the Debt Agreements.

  The Company has issued various subordinated seller notes payable in connection
with certain acquisitions ("Subordinated Seller Notes"). These notes bear
interest at varying rates ranging from 6.0% to 9.0%, require quarterly payments
of interest and principal, and mature at varying dates ranging from June 2000
through June 2002.

  The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 2000, under their original terms, were as follows (in
thousands), however, $63.7 million of debt has been classified as current
maturities and is subject to acceleration by the holders:

         2001.................................... $  12,501
         2002....................................    36,607
         2003....................................         -
         2004....................................         -
         2005....................................         -
        Thereafter...............................    15,000
                                                  ---------
                                                  $  64,108
                                                  =========
5. COMMITMENTS AND CONTINGENCIES:

   Lease Commitments

   Future minimum lease payments under non-cancelable operating leases with
remaining terms of one or more years consisted of the following at December
31, 2000 (in thousands):

         2001...................................  $   5,023
         2002...................................      4,774
         2003...................................      4,083
         2004...................................      2,994
         2005...................................      2,154
         Thereafter.............................      4,257
                                                  ---------
         Total minimum lease obligation.........  $  23,285
                                                  =========

  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

  In June 2000, the Company recorded litigation expenses of $1,495,000 resulting
from an arbitration award against two subsidiaries of the Company in an
arbitration proceeding in Los Angeles, California.  The arbitrator found that
the subsidiaries had breached a contractual agreement to acquire a dental
practice and awarded the plaintiffs actual damages and costs of $442,000.  In
August 2000, the arbitrator awarded the plaintiffs an additional $666,000 for
attorney fees and costs, resulting in a total judgment of $1,108,000 against the
Company's subsidiaries. This amount, as well as additional legal expenses
incurred by the Company, was included in the litigation expenses recorded in
June 2000.  None of the judgment amount awarded to the plaintiffs has been paid
as of April 16, 2001.

   In August 1998, the former owner of certain dental practices acquired by the
Company in August 1996, filed a lawsuit against the Company in the 190th
District Court of Harris County, Texas. The lawsuit alleged

                                      F-14
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

that the Company committed various acts of fraud, securities fraud, conspiracy,
breach of contract and misrepresentation concerning the value of the Company's
common stock issued in the acquisition of the dental practices. In August 1999,
the Company settled the lawsuit for $1.4 million, all of which has been paid.

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

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

6. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                        -----------------------
                                                           1999         2000
                                                        ----------   ----------
                                                             (in thousands)
<S>                                                     <C>          <C>
Deferred tax assets:
  Net operating loss carryforward.....................  $      543   $    7,884
  Deferred compensation...............................         200           50
  Allowance for bad debts.............................       2,018        2,811
  Other...............................................         114          301
                                                        ----------   ----------
     Total deferred assets............................       2,875       11,046
Less valuation allowance..............................           -       (5,214)
                                                        ----------   ----------
Deferred tax liabilities:
  Unbilled receivables................................      (1,778)      (1,153)
  Loss of Subchapter S status.........................          (4)           -
  Management services agreement.......................      (4,428)      (3,303)
  Property and equipment..............................      (1,057)      (1,065)
  Other...............................................         (16)        (311)
                                                        ----------   ----------
                                                            (7,283)      (5,832)
                                                        ----------   ----------
Net deferred tax liabilities..........................      (4,408)           -
Less current asset portion............................       2,488            -
                                                        ----------   ----------
  Non-current liabilities.............................  $   (6,896)  $        -
                                                        ==========   ==========
</TABLE>

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

                                                    Year Ended December 31,
                                               --------------------------------
                                                 1998         1999       2000
                                               --------     -------    --------
                                                         (in thousands)
 Current tax provision (benefit):
       Federal..........................       $    (70)    $    17    $    481
       State............................             (8)          2          57
                                               --------     -------    --------
        Total current...................            (78)         19         538
                                               --------     -------    --------
 Deferred tax provision (benefit):
       Federal..........................          1,403         730      (2,803)
       State............................            165          86        (330)
                                               --------     -------    --------
        Total deferred..................          1,568         816      (3,133)
                                               --------     -------    --------
        Provision (benefit) for income
          taxes.........................          1,490         835      (2,595)
                                               ========     =======    ========

                                      F-15
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                   ------------------------------------
                                                                     1998          1999        2000
                                                                   ---------     --------    ----------
                                                                              (in thousands)
<S>                                                                <C>           <C>         <C>
Tax at U.S. statutory rate (34%)................................   $   1,726     $    691    $   (7,385)
State income taxes, net of federal tax..........................         203           81          (869)
Nondeductible expenses and other................................          26           63            65
Change in estimate of net operating loss carryforward...........        (465)           -           380
Valuation allowance.............................................           -            -         5,214
                                                                   ---------     --------    ----------
  Provision (benefit) for income taxes..........................   $   1,490     $    835    $   (2,595)
                                                                   =========     ========    ==========
</TABLE>

  At December 31, 2000, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $21.8 million,
expiring in years from 2016 through 2020.

7.  STOCK OPTION PLANS:

  The Company grants stock options under the Castle Dental Centers, Inc. Omnibus
Stock and Incentive Plan, a stock-based incentive compensation plan (the
"Employees' Plan"), and the Non-employee Directors' Stock Option Plan (the
"Directors' Plan," together the "Plans") which are described below. The Company
recognizes stock-based compensation issued to employees at the intrinsic value
between the exercise price of options granted and the fair value of stock for
which the options may be exercised. However, pro forma disclosures as if the
Company recognized stock-based compensation at the fair-value of the options
themselves are presented below.

  Under the Employees' Plan, the Company is authorized to issue 1,050,000 shares
of Common Stock pursuant to "Awards" granted to officers and key employees in
the form of stock options and restricted stock. Under the Directors' Plan, the
Company is authorized to issue 150,000 shares of Common Stock to non-employee
directors of the Company.

  There are 930,400 and 100,000 options granted under the Employees' Plan and
the Directors' Plan, respectively, at December 31, 2000. The Compensation
Committee administers the Plans. These stock options have contractual terms of
10 years and have an exercise price no less than the fair market value of the
stock at grant date. The options vest at varying rates over a four or five-year
period, beginning on the first anniversary of the date of grant.

                                      F-16
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

  Following is a summary of the status of the Company's stock options as of
December 31, 2000 and the changes during the three-year period then ended:

                                               Number of         Weighted
                                               Shares of         Average
                                              Underlying         Exercise
                                                Options           Price
                                              -----------     -------------
Outstanding at January 1, 1998..........         634,250       $     10.59
Granted.................................         281,750       $      5.31
Excercised..............................               -                 -
Forfeited...............................         (72,600)            11.03
Expired.................................               -                 -
                                               ---------       -----------
Outstanding at December 31, 1998........         843,400       $      8.79
                                               =========       ===========
Excercisable at December 31, 1998.......         126,680       $     10.47
                                               =========       ===========

Granted.................................         252,650       $      2.57
Excercised..............................               -                 -
Forfeited...............................         (52,223)             6.23
Expired.................................         (13,727)             8.93
                                               ---------       -----------
Outstanding at December 31, 1999........       1,030,100       $      7.27
                                               =========       ===========
Excercisable at December 31, 1999.......         287,682       $      9.34
                                               =========       ===========

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

  The fair value of each stock option granted by the Company is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: dividend yield of 0% for each year; expected
volatility of 56.9% for 1998, 67.9% for 1999, and 79.1% for 2000; risk-free
interest rates are 4.7% for 1998, 6.1% for 1999 and 6.6% for 2000; and the
expected lives of the options average five years.

                                      F-17
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

  The following table summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                        Options Outstanding                    Options Exercisable
                            -----------------------------------------      --------------------------
                             Weighted         Average        Weighted         Number        Weighted
                              Number         Remaining       Average        Exercisable      Average
                            Outstanding       Contract       Exercise            at         Exercise
Range of Exercise Price     at 12/31/00        Life           Price          12/31/00         Price
-----------------------     -----------      ---------     ----------      ------------    ----------
<S>                         <C>                <C>         <C>                 <C>          <C>
$2.31 to $8.00.........        531,150         8.36        $     3.63          177,850      $    4.15
$8.00 to $13.00........        499,250         6.65        $    10.60          312,300      $   10.58
                            -----------                                    ------------
                             1,030,400         7.53        $     7.01          490,150      $    8.24
                            ===========                                    ============
</TABLE>

  Had the compensation cost for the Company's stock-based compensation plans
been determined using the fair value of the options, the net income and
basic and diluted net income per common share for 1998 would approximate $3.5
million or $0.54 per share; the Company's net income and diluted net income per
share for 1999 would approximate $796,000, or $0.12 per share; the Company's net
loss and diluted net loss per share for 2000 would approximate $19.5 million, or
$3.03 per share.

  The effects of applying fair value accounting in this pro forma disclosure are
not indicative of future amounts.

8. EARNINGS PER SHARE:

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

                                                  December 31,
                                         ------------------------------
                                           1998       1999       2000
                                         -------    -------    --------
                                                   (in thousands)
  Shares
     Shares-basic (1).................    6,586      6,825       6,451
     Options and warrants.............       22         25           -
                                          -----      -----       -----
     Shares-diluted...................    6,608      6,850       6,451
                                          =====      =====       =====

----------
(1) Includes the weighted average of 407,544 shares of common stock issuable
    upon the exercise of a conversion right. This conversion right was
    terminated in January 2000 when the Company acquired the minority interest
    in its California subsidiary.

  Options to purchase an aggregate 616,000 shares of common stock at exercise
prices of $10.00 to $13.00 per share were excluded from the calculation of
diluted earnings per share for 1998 because their effect would have been
antidilutive. Options to purchase an aggregate 604,000 shares of common stock at
exercise prices of $6.00 to $13.00 per share were excluded from the calculation
of diluted earnings per share for 1999 because their effect would have been
antidilutive. Options to purchase an aggregate 1,030,400 shares of common stock
at exercise prices of $2.31 to $13.00 per share were excluded from the
calculation of basic and diluted loss per share for 2000 because their effect
would have been antidilutive.

  A warrant to purchase 56,579 shares of common stock at $11.00 per share was
excluded from the calculation of diluted earnings per share for 1998 and 1999
because its effect would have been antidilutive. The warrant expired in December
2000.

9.  DEFINED CONTRIBUTION PLANS:

  In August 1996, the Company adopted a defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan").
All permanent employees of the Company are eligible to participate in the 401(k)
Plan upon the completion of three months of service. The Company may match
contributions made by participants under the Plan each year in an amount
determined by the Company on a year-to-year basis. The Company did not make any
contributions to the Plan in 1998, 1999, or 2000.

                                      F-18
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

10. SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                               ------------------------------------------
                                                                                 1998            1999            2000
                                                                               ---------      ----------      -----------
<S>                                                                            <C>            <C>             <C>
Cash paid during the period for:
 Interest.............................................................         $   1,803       $   3,997       $   5,068
 Income taxes.........................................................               222             595             294
Supplemental disclosure of noncash investing and financing activities:
 Acquisition stock guarantee payment accrual..........................                 -             430               -
 Conversion of Series B Preferred Stock to subordinated notes.........             1,550               -               -
</TABLE>

11. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

  Credit Risk

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

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

  Financial Instruments

  The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

  The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and the revolving line of credit approximate fair values due to
the short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings as of December 31, 1999 and 2000, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.

  Interest Rate Swaps:

  Interest expense is subject to fluctuations as interest rates change,
specifically U.S. interest rates. To manage this risk, the Company has entered
into a swap which involves the exchange of fixed- and floating-rate interest
payment obligations without the exchange of the underlying principal amounts, as
part of the overall strategy of limiting exposure to fluctuations in U.S.
short-term interest rates.

  As of December 31, 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%. For 2000, the
weighted-average variable rate, based upon a three-month LIBOR rate, was 6.78%.
The weighted-average variable rates are subject to change over time as LIBOR
fluctuates. During 2000, the Company was required to pay $52,000 in payments
under the swap agreement. The term of the swap contract expires July 10, 2001.


                                      F-19
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


12. RELATED PARTY TRANSACTIONS:

  The Company maintains a management services agreement with one of the
Company's affiliated dental practices in Texas pursuant to which the sole
shareholder of the affiliated dental practice, a member of the Board of
Directors of the Company, receives an annual salary of $100,000 to take actions
necessary to maintain the dental license for the affiliated dental practice in
the state of Texas, for as long as he holds such license and is the sole
shareholder of the practice. Such compensation arrangement was negotiated
between the shareholder and previously unaffiliated investors in the Company. In
1995, in connection with the Company's acquisition of the assets of the
shareholder's dental practice, the Company entered into a deferred compensation
agreement with the shareholder pursuant to which the Company agreed to pay the
shareholder $2.6 million in 20 quarterly installments of $131,500, beginning
March 1996. As of December 31, 2000, there was $131,500 payable to the
shareholder under the terms of the deferred compensation agreement.

  At December 31, 1999 and 2000, certain executive officers of the Company had
outstanding loans in the aggregate amount of $307,000 and $67,500, respectively,
from the Company. The Company forgave $265,000 in loans to its former president
and chief operating officer at December 31, 2000. These loans are repayable over
varying periods ranging from one to five years and bear interest at rates
ranging from zero to six percent.

   A director of the Company is a Managing Director of The GulfStar Group, Inc.
("GulfStar"), which has provided investment banking and advisory services to the
Company.  The Company paid $183,000 during 1998 in investment banking fees to
GulfStar. The Company made no payments to Gulfstar during 1999 and 2000.

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

  The Company entered into a lease agreement with Goforth, Inc., a company owned
by the Company's chairman of Board of Directors (the "Affiliate"). The Company
has agreed to pay the Affiliate a minimum guaranteed rental of $12,000 per month
through December 2000 and $13,200 per month from January 2001 through January
2006 for rental of a dental center. The Company has also agreed to pay
additional rent of approximately $1,600 per month for insurance, taxes and
common area maintenance. The Company paid $174,000 under this agreement during
1998, 1999 and 2000.

                                      F-20
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

13.  ASSET IMPAIRMENT

  The $3.6 million asset impairment results primarily from the closing of six
dental offices in Florida, Texas and California, a charge to reflect the
impairment in the value of fixed assets for eleven under-performing dental
offices, and the write-off of related intangible assets and long-term
receivables associated with certain acquisitions. As a result, the Company
reduced intangible assets by approximately $1.2 million, leasehold improvements
and equipment by approximately $1.7 million, and other assets by approximately
$0.7 million.

14.  QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>

                                                        First             Second            Third         Fourth
                                                      ----------       ------------       ----------    -----------
                                                                   (in thousands, except per share data)
1999
<S>                                                     <C>               <C>               <C>           <C>
 Net patient revenues............................       $25,167           $25,661           $ 26,092      $ 25,781
 Operating income................................         2,639             2,565              2,033           414
 Net income......................................         1,003               107                507          (421)
 Basic and diluted earnings per share (1)........       $  0.15           $  0.02           $   0.07      $  (0.06)

2000
 Net patient revenues............................       $26,530           $26,699           $ 27,115      $ 25,679
 Operating income (loss).........................         1,944             1,705            (10,642)       (5,508)
 Net income (loss)...............................           312              (911)           (10,513)       (8,012)
 Basic and diluted earnings per share (1)........       $  0.05           $ (0.14)          $  (1.64)     $  (1.25)
</TABLE>
______________
(1) Earnings per share are computed independently for each of the quarters
    presented. Therefore, the sum of the quarterly earnings per share does not
    equal the total computed for the year due to stock transactions that
    occurred.

                                      F-21
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

15. OPERATING SEGMENTS:

  Financial information is provided below for each of the Company's operating
regions. The Company measures the performance of its regional operations
primarily based on net patient revenues and operating income. There are no
inter-regional revenues. The Company's primary measure of profit by which it
formulates decisions and communicates to investors and analysts is net income
and earnings per share. Financial information internally reported for the
Company for the years ended December 31, 1998, 1999 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                 --------------------------------------
                                                                   1998           1999           2000
                                                                 -------        --------       --------
                                                                              (in thousands)
<S>                                                              <C>            <C>            <C>
Net patient revenues:
  Texas................................................          $47,464        $ 68,362       $ 70,948
  Florida..............................................           11,951          12,142         11,348
  Tennessee............................................            7,853          10,236         12,592
  California...........................................            7,555          11,961         11,135
                                                                 -------        --------       --------
 Total patient revenues................................          $74,823        $102,701       $106,023
                                                                 -------        --------       --------

Operating expenses:
  Texas................................................          $39,865        $ 59,406       $ 74,462
  Florida..............................................           10,351          11,607         13,271
  Tennessee............................................            7,419           9,276         12,563
  California...........................................            6,289          10,387         10,346
  Corporate, general and administrative expenses.......            3,911           4,225          7,882
                                                                 -------        --------       --------
  Total operating expenses.............................          $67,835        $ 94,901       $118,524
                                                                 -------        --------       --------

Operating income (loss):
  Texas................................................            7,599           8,956         (3,514)
  Florida..............................................            1,600             535         (1,923)
  Tennessee............................................              434             960             29
  California...........................................            1,266           1,574            789
  Corporate, general and administrative expenses.......           (3,911)         (4,225)        (7,882)
                                                                 -------        --------       --------
  Total operating income...............................            6,988           7,800        (12,501)
Litigation settlement..................................                -           1,366          1,495
Interest expense.......................................            1,969           4,369          7,751
Other (income) expense.................................              (57)             34            (28)
                                                                 -------        --------       --------
Income (loss) before provision (benefit) for income
 taxes.................................................          $ 5,076        $  2,031       $(21,719)
                                                                 =======        ========       ========

                                                                          Year Ended December 31,
                                                                 --------------------------------------
                                                                                  1999           2000
                                                                                --------       --------
Assets:
  Texas................................................                         $ 65,207       $ 53,680
  Florida..............................................                           11,928          9,579
  Tennessee............................................                            9,320          8,025
  California...........................................                           22,302         20,954
                                                                                --------       --------
    Total assets for reportable segments...............                          108,757         92,238
  Other unallocated amounts............................                            6,225          3,148
                                                                                --------       --------
    Total assets.......................................                         $114,982       $ 95,386
                                                                                ========       ========
</TABLE>

                                      F-22
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

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

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

                                        PricewaterhouseCoopers LLP

Houston, Texas
April 16, 2001

                                      S-1
<PAGE>

                          CASTLE DENTAL CENTERS, INC.

               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                  Balance                                                    Balance
                                                 Beginning       Charged To                                  At End
PATIENT RECEIVABLES:                              Of Year         Expenses     Deductions     Other          Of Year
                                                 ---------       ----------    ----------    ------          --------
<S>                                              <C>               <C>           <C>         <C>              <C>
Year ended December 31, 1998:
Allowance for uncollectible accounts -
  patient receivables                             $ 3,929          $ 2,474       $ 1,092     $3,197(1)        $ 8,508
                                                  =======          =======       =======     ======           =======

Year ended December 31, 1999:
 Allowance for uncollectible accounts -
  patient receivables                             $ 8,508          $ 3,914       $     -     $1,166(1)(2)     $13,588
                                                  =======          =======       =======     ======           =======

Year ended December 31, 2000:
 Allowance for uncollectible accounts -
  patient receivables                             $13,588          $13,157       $15,033     $  329(2)        $12,041
                                                  =======          =======       =======     ======           =======


                                                  Balance                                                    Balance
                                                 Beginning       Charged To                                  At End
UNBILLED PATIENT RECEIVABLES:                     Of Year         Expenses     Deductions     Other          Of Year
                                                 ---------       ----------    ----------    ------          --------
Year ended December 31, 1998:
 Allowance for uncollectible accounts -
  unbilled patient receivables                    $   568          $    71       $    30     $   49           $   658
                                                  =======          =======       =======     ======           =======

Year ended December 31, 1999:
 Allowance for uncollectible accounts -
  unbilled patient receivables                    $   658          $   246       $     -     $    -           $   904
                                                  =======          =======       =======     ======           =======

Year ended December 31, 2000:
 Allowance for uncollectible accounts -
  unbilled patient receivables                    $   904          $ 2,168       $ 2,334     $    -           $   738
                                                  =======          =======       =======     ======           =======
</TABLE>
___________
(1) Acquired allowances for uncollectible accounts of affiliated dental
    practices.

(2) Adjustments to patient accounts that are charged to the allowance for
    doubtful accounts.

                                      S-2
<PAGE>

<TABLE>
<CAPTION>
(a)(3) Exhibits

EXHIBIT
NUMBER                                DESCRIPTION OF EXHIBIT
-------                               ----------------------
<C>       <S>
*3.1 --   Certificate of Incorporation of Castle Dental Centers, Inc., as amended.
*3.2 --   Certificate of Amendment to Certificate of Incorporation of Castle Dental Centers,
          Inc., dated August 28, 1996.
*3.3 --   Certificate of Amendment of Certificate of Incorporation of Castle Dental Centers,
          Inc., dated June 16, 1997.
*3.4 --   Bylaws of Castle Dental Centers, Inc.
*3.5 --   Amendment to Bylaws of Castle Dental Centers, Inc. dated August 16, 1996.
*4.1 --   Form of Certificate representing the Common Stock, par value $.001 per share, of
          Castle Dental Centers, Inc.
*4.2 --   Registration Rights Agreement dated December 18, 1995, among Castle Dental
          Centers, Inc. and Delaware State Employees' Retirement Fund, Declaration of
          Trust for Defined Benefit Plan of ICI American Holdings, Inc., Declaration of Trust
          for Defined Benefit Plan of Zeneca Holdings, Inc. and certain stockholders and
          investors in the Company.
4.3 --    Stockholders Agreement dated as of January 31, 2000, by and among Castle Dental
          Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and certain
          stockholders and investors in the Company. (Incorporated herein by reference from the
          Company's Form 10-K, dated as of March 31, 2000)
4.4 --    Registration Rights Agreement dated as of January 31, 2000, by and among Castle
          Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and
          certain stockholders and investors in the Company. (Incorporated herein by reference from the
          Company's Form 10-K, dated as of March 31, 2000)
*10.1 --  Management Services Agreement effective December 18, 1995 by and between
          Castle Dental Centers of Texas, Inc. and Jack H. Castle, D.D.S., P.C.
*10.2 --  Amendment to Management Services Agreement between Castle Dental Centers of
          Texas, Inc. and Jack H. Castle, D.D.S., P.C., dated as of August 15, 1996.
*10.3 --  Indemnity Agreement dated December 18, 1995 by and between Castle Dental
          Centers, Inc. and G. Kent Kahle.
*10.4 --  Indemnity Agreement dated December 18, 1995, by and between Castle Dental
          Centers, Inc. and Jack H. Castle, D.D.S.
*10.5 --  Indemnity Agreement dated December 18, 1995 by and between Castle Dental
          Centers, Inc. and Jack H. Castle, Jr.
*10.6 --  Indemnity Agreement dated December 18, 1995 by and between Castle Dental
          Centers, Inc. and Robert J. Cresci.
*10.7 --  Indemnity Agreement dated August 16, 1996 by and between Castle Dental Centers,
          Inc. and Elizabeth A. Tilney.
*10.8 --  Management Services Agreement effective May 19, 1996 by and between Castle
          Dental Centers of Florida, Inc. and Castle 1st Dental Care, P.A.
*10.9 --  Amendment to Management Services Agreement between Castle Dental Centers of
          Florida, Inc. and Castle 1st Dental Care, P.A., dated as of August 16, 1996.
*10.10 -- Management Services Agreement effective May 31, 1996 by and between Castle
          Dental Centers of Tennessee, Inc. and Castle Mid-South Dental Center, P.C.
</TABLE>
<PAGE>

<TABLE>
<C>                 <S>
*10.11 -- Amendment to Management Services Agreement between Castle Dental Centers of
          Tennessee, Inc. and Castle Mid-South Dental Center, P.C., dated as of August 16,
          1996.
*10.12 -- 1996 Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan, as amended.
*10.13 -- 1996 Castle Dental Centers, Inc. Non-Employee Directors' Plan, as amended.
*10.14 -- Lease dated January 1, 1996 by and between Goforth, Inc. and Family Dental
          Services of Texas, Inc.
*10.15 -- Form of Subordinated Promissory Note issued to former members of Dental
          Consulting Services, LLC ("DCS"). (Incorporated by reference from the
          Company's Form 8-K dated as of March 30, 1998.)
*10.16 -- Form of Subordination Agreement entered into between each former member of
          DCS, Castle and NationsBank of Texas, N.A., as Agent. (Incorporated by reference
          from the Company's Form 8-K dated as of March 30, 1998.)
*10.17 -- Asset Purchase Agreement dated as of December 30, 1998, by and among Castle
          Dental Centers of Texas, Inc., Castle Dental Centers, Inc., and Jack H. Castle,
          D.D.S., P.C., and DCA Limited Partnership, L.L.P. ("DCA, Ltd."), Dental
          Administrators of Texas Limited Partnership, L.L.P. ("DAI, Ltd."), Dental Centers
          of America Paymaster P.C. ("Paymaster"), Bandera Road Dental Center, P.C.
          ("Bandera"), Ingram Park Family Dental Center, P.C. ("Ingram"), Northeast Family
          Dental Center, P.C. ("Northeast"), Dental Centers of America at Rolling Oaks Mall,
          PLLC ("Rolling Oaks"), San Pedro Family Dental Center, P.C. ("San Pedro"),
          Southpark Family Dental Center, P.C. ("Southpark"), Windsor Park Family Dental
          Center, P.C. ("Windsor"), Dental Centers of America at Barton Creek Square Mall,
          PLLC ("Barton Creek"), Dental Centers of America at Lakeline Mall,  PLLC
          ("Lakeline"), Dental Centers of America at Hurst Northeast Mall, PLLC ("Hurst"),
          Dental Centers of America at Irving Mall, PLLC ("Irving"), Dental Centers of
          America at Six Flags Mall, PLLC ("Six Flags"), Dental Centers of America at
          Waco, P.C. ("Waco"), Dental Centers of America at Mesquite, P.C. ("Mesquite"),
          Dental Centers of America at Sherman, P.C. ("Sherman"), Dental Centers of
          America at Richardson Square Mall, P.C. ("Richardson" and, collectively with
          DCA, Ltd., DAI, Ltd., Paymaster, Bandera, Ingram, Northeast, Rolling Oaks, San
          Pedro, Southpark, Windsor, Barton Creek, Lakeline, Hurst, Irving, Six Flags, Waco,
          Mesquite and Sherman, the "DCA Sellers"), Barry E. Solomon, D.D.S., an
          individual living in San Antonio, Texas ("B. Solomon"), Marc A. Solomon, an
          individual living in San Antonio, Texas ("M. Solomon"), Hebron D. Cutrer, an
          individual living in San Antonio, Texas ("Cutrer"), Stan E. Faye, an individual
          living in San Antonio, Texas ("Faye"), and Robert B. Grau, an individual living in
          San Antonio, Texas ("Grau", and together with B. Solomon, M. Solomon, Cutrer
          and Faye, the "DCA Shareholders"). (Incorporated by reference from the
          Company's Form 8-K dated as of December 30, 1998.)
*10.18 -- Form of Subordinated Promissory Note issued to DCA Sellers and/or DCA
          shareholders. (Incorporated by reference from the Company's Form 8-K dated as of
          December 30, 1998.)
*10.19 -- Form of Subordination Agreement entered into between each DCA Seller and/or
          DCA Shareholder receiving a Subordinated Promissory Note, Castle Dental and
          NationsBank, N.A., as Agent. (Incorporated by reference from the Company's Form
          8-K dated as of December 30, 1998.)
*10.20 -- Amended and Restated Credit Agreement dated as of December 18, 1998, by and
          among Castle Dental, NationsBank, N.A., as agent, and the lenders thereunder.
</TABLE>
<PAGE>

<TABLE>
<S>       <C>
          (Incorporated by reference from the Company's Form 8-K dated as of December 30,
          1998.)
 10.21 -- Third Amendment to Amended and Restated Credit Agreement dated as of January
          20, 2000, by and among Castle Dental Centers, Inc., Bank of America, N.A., as
          agent, and the lenders thereunder. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.22 -- Settlement Agreement dated January 28, 2000, between Castle Dental Centers, Inc.,
          Castle Dental Centers of California, L.LC., CDC of California, Inc. and the former
          owners of DCS. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.23 -- Senior Subordinated Note Purchase Agreement dated as of January 31, 2000, is
          among Castle Dental Centers, Inc., Heller Financial, Inc., and Midwest Mezzanine
          Fund II, L.P. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.24 -- Form of Subordinated Note issued pursuant to Senior Subordinated Note Purchase
          Agreement dated January 31, 2000. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.25 -- Form of Convertible Subordinated Note issued pursuant to Senior Subordinated
          Note Purchase Agreement dated January 31, 2000. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.26 -- Fourth Amendment to Amended and Restated Credit Agreement dated effective as
          of December 31, 1999, by and among Castle Dental Centers, Inc., Bank of America,
          N.A., as agent, and the lenders thereunder. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 10.27 -- First Amendment to Senior Subordinated Note Purchase Agreement dated as of
          May 19, 2000, by and among Castle Dental Centers, Inc., Heller Financial, Inc., and
          Midwest Mezzanine Fund II, L.P. (Incorporated herein by reference from the Company's
          Form 10-K, dated as March 31, 2000)
 21    -- Subsidiaries of the Registrant.
</TABLE>
_____________
* Incorporated herein by reference to the Company's Registration Statement on
  Form S-1 (registration number 333-1335)