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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, 1999

                                       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 May 16, 2000, 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 $8.2 million, were held by
non-affiliates of the registrant.

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                                TABLE OF CONTENTS
                                                                     PAGE
Item  1. Business....................................................  1
         The Company ................................................  1
         The Dental Industry.........................................  2
         Business Strategy ..........................................  3
         Dental Network Development..................................  3
         Management Services Agreement...............................  5
         Dentist Employment Agreements...............................  5
         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
         Year 2000................................................... 23
         Inflation................................................... 23
Item  7A.Quantitative And Qualitative Disclosures About Market Risk.. 23
Item  8. Financial Statements and Supplementary Data................. 24
Item  9. Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure....................... 24
Item  10. Directors and Executive Officers of the Registrant......... 25
Item  11. Executive Compensation..................................... 27
Item  12. Security Ownership of Certain Beneficial Owners
            and Management........................................... 29
Item  13. Certain Relationships and Related Transactions............. 31
Item  14. Exhibits, Financial Statement Schedules and Reports
            on Form 8-K.............................................. 33

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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, 1999, the Company provided management services to 102 dental
centers with approximately 250 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 will enable affiliated dentists, orthodontists and other dental
specialists to focus on delivering quality patient care and to 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 70 capitated managed care contracts covering
approximately 110,000 members at December 31, 1999. 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 national expansion.

   Since the end of 1996, the Company has expanded to a total of 25 dental
centers in Houston through the development of nine DE NOVO dental centers and
the March 1998 acquisition of six dental centers owned by Dental World, Inc. In
May 1996, the Company acquired the assets of and entered into long-term
management services agreements with 1st Dental Care, a dental practice with 11
locations in the Tampa/Clearwater, Florida area, and Mid-South Dental Centers, a
dental practice with six dental centers in various locations in Tennessee. In
August 1996, the Company increased its dental practices under management in
Texas by acquiring the assets of Horizon Dental Centers, a dental practice with
four dental centers in Fort Worth, Texas and four dental centers in Austin,
Texas. In September 1997, the Company acquired SW Dental Associates, LC, a
dental practice with four dental centers in the Austin, Texas metropolitan area.
In December 1997, the Company acquired substantially all the assets of two
individual practices in Ft. Worth, Texas and Nashville,

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Tennessee. 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, a dental management company
affiliated with five dental centers in the Los Angeles area. Subsequent to March
1998, Castle West acquired three additional dental practices with four dental
offices in the Los Angeles area increasing the number of dental centers managed
by the Company to nine in that market. In July 1998, the Company acquired a
dental management company and five related dental practices in Florida. In
December 1998, the Company completed the acquisition of the assets of Dental
Centers of America and its affiliated dental practices. Dental Centers of
America operated 16 dental centers in San Antonio, Austin, Waco and the
Dallas/Fort Worth metroplex. (All of the acquisitions are collectively referred
to as the "Completed Acquisitions").

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.

   The Company believes that the provision of dental, orthodontic and other
specialty care will follow the pattern set by other segments of the health care
industry, moving away from the sole practitioner model to a group practice
environment in which a separate professional management team handles personnel,
management, billing, marketing and other business functions. The trends which
are leading dentists to affiliate with dental practice management companies
include; (i) the increasingly capital intensive nature of acquiring and
maintaining state-of-the-art dental equipment, laboratory and clinical
facilities; (ii) the growing need to develop and maintain specialized management
information and billing systems to meet the increasing demands of payers; and
(iii) the increasingly more complicated, competitive and regulated business
environment for

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dentists.

BUSINESS STRATEGY

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

      PROVIDE HIGH-QUALITY, COMPREHENSIVE, ONE-STOP FAMILY DENTAL HEALTH CARE.
   The prototypical Castle Dental Center provides general dentistry as well as a
   full range of dental specialties (including orthodontics, pedodontics,
   periodontics, endodontics, oral surgery and implantology), thereby allowing
   the majority of specialty referrals to remain in-house within the Company's
   network of facilities. By bringing together multi-specialty dental services
   within a single practice, the Company is able to realize operating
   efficiencies and economies of scale and to promote increased productivity,
   higher utilization of professionals and facilities, and the sharing of dental
   specialists among multiple locations. The Company's practice model also
   incorporates quality assurance and quality control programs, including peer
   review and continuing education and technique enhancement. The Company
   believes that its multi-specialty strategy significantly differentiates it
   from both individual and multi-center practices that typically offer only
   general dentistry, orthodontics or other single specialty dental services.

      DEVELOP COMPREHENSIVE DENTAL NETWORKS IN TARGET MARKETS. The Company
   intends to build its networks through DE NOVO development of additional
   practices within 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

   The Company seeks to build its dental networks through the DE NOVO
development of dental practices in retail environments. Prior to 1999, the
Company has expanded into new markets through the acquisition of multi-location
group dental practices. Once the market entry acquisition has been made, the
Company has expanded within its target markets primarily through the DE NOVO
development of new dental centers. In 1999, the Company entered the Corpus
Christi, Texas market by opening two DE NOVO centers. During 1999, the Company
expanded solely through the development of DE NOVO centers and did not complete
any acquisitions of dental practices.

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DE NOVO DEVELOPMENT

   The Company opened 20 newly developed dental centers in 1999; three in
Houston, two in Austin, three in Dallas/Fort Worth, four in San Antonio, two in
Corpus Christi, Texas and four in Nashville, Tennessee. All of the new centers
were located in leased facilities in neighborhood retail shopping centers areas.
The two DE NOVO centers opened in Corpus Christi, Texas represent the Company's
first venture into a new market other than by acquisition of existing dental
centers. Development of each DE NOVO dental center costs approximately $300,000
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.

   At December 31, 1999, the Company had four DE NOVO dental centers under
various stages of development in Dallas, Nashville and Florida. The Company also
had two centers under development for the purpose of relocating existing centers
in the Houston area. The Company is expanding its development of DE novo dental
centers in existing markets because management believes that opening of 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.

ACQUISITION CRITERIA

   The Company's acquisition strategy has been to identify successful dental
management companies and dental practices in its target markets, acquire certain
assets of the identified practices, enter into long-term management services
agreements, and utilize these core practices as a base from which to expand
within the target markets. Prior to entering any market, the Company considers
such factors as population, demographics, market potential, competitive
environment, supply of available dentists, dental regulatory environment,
patient-provider ratios, advertising costs and the economic condition of the
local market. Core acquisition candidates are successful group dental practices
that the Company believes are leaders in their regional markets. In considering
acquisitions, the Company evaluates qualitative issues such as the dental
professionals' qualifications, experience and reputation in the local
marketplace and their operating histories, as well as the ability to demonstrate
potential for revenue growth and continued profitability.

   The contractual arrangements pursuant to which the Completed Acquisitions
were made include representations and warranties from the sellers regarding the
assets or stock being acquired, and management services agreements with the
affiliated practices containing non-competition provisions with the former
owners of such practices. Additionally, the Company typically has entered into
option agreements with the owners of its affiliated dental practices that
entitles the Company to select successor owners of the affiliated dental
practice. In some acquisitions, the Company has acquired the assets or stock of
the practice management company and either entered into new management services
agreements with the affiliated dental practices or assigned the dentist
employment agreements and other contractual obligations to an affiliated dental
practice with which the Company has an existing management services agreement.

AFFILIATION AND INTEGRATION OF DENTAL CENTERS

   In acquiring dental practice management companies and affiliating with dental
practices, the Company typically: (i) acquires certain assets of the practice,
and, in certain situations, laboratory or other ancillary facilities that are
either owned by or affiliated with such practice as allowable by federal and
state law; (ii) enters into a long-term management services agreement with such
dental practice pursuant to which the Company provides comprehensive management
services to the affiliated practice; (iii) requires that the affiliated dentists
enter into employment agreements with the affiliated practices containing
non-compete and liquidated damages provisions; and (iv) assumes the principal
administrative, financial, marketing and general management functions of the
affiliated practice, including employment of most administrative personnel. As
soon as practicable following the acquisition of an affiliated dental practice,
the Company initiates the process of converting the affiliated practice into a
Castle Dental Center. This conversion process, the implementation and timing of
which will vary from market to market, typically includes the addition of
specialty dental services not previously offered by the practice, implementation
of retail business concepts applied by the Company, and the implementation of
operating procedures employed by the Company, including standardization of
dental practice management, accounting and financial software. During 1999, the
Company

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completed the integration of all acquired dental practices and each of the
Company's dental centers operate under the Castle Dental Centers name, utilize
the same practice management software and follow the Company's standard
operating procedures.

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 California professional
corporations that own dental practices formerly managed by DCS, 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 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, 1999, all 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 the bankruptcy or default in the performance of the
material duties of the non-terminating party.

DENTIST EMPLOYMENT AGREEMENTS

   Each affiliated dental practice has entered into employment agreements with
substantially all of its full-time dentists, orthodontists and other dental
specialists. Although the form of contract varies somewhat among practices and
among dentists with different specialties, the typical contract for a full-time
dentist provides for a defined compensation arrangement, including
performance-based compensation and, where market conditions permit and to the
extent deemed enforceable under applicable law, a covenant not to compete. Each
full-time

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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.

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 and Sundays. 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

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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 24 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. During 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.

   Most affiliated dental practices have policy boards comprised of
representatives of both the Company and the affiliated dental practice. The
policy boards are responsible for developing and implementing management and
administrative policies for the overall operation of the affiliated dental
practice. Specifically, the policy board has the authority to review and approve
capital improvements and expansion, marketing and advertising, collection
policies, provider and payer relationships, strategic planning and capital
expenditures. However, in recognition of the laws and regulations applicable to
the licensure and practice of dentistry, the policy board does not make clinical
decisions, recommendations or other decisions that are required to be made by a
licensed dentist.

SALES AND MARKETING

   The Company intends to establish a consistent national identity for its
business and to utilize the "Castle Dental Centers" name and logo at all its
dental centers. As of December 31, 1999, the Castle Dental Centers name had been
implemented at all affiliated locations. The Company applies traditional retail
principles of business to the provision of dental care. These principles include
network development, extended hours of operation, location optimization,
signage, customized treatment schedules, affordable fees and payment plans. The
Company uses both print advertising and professionally produced broadcast
advertising to market its dental services to potential patients its existing
markets and intends to use the same marketing techniques in newly acquired
markets.

   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

                                       7
<PAGE>
follow-up visits and regularly scheduled six-month periodic exams. 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. This system is presently utilized in all
of the Company's markets. 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, 1999, the Company and its affiliated dental practices
maintained an aggregate of 70 capitated managed care contracts covering
approximately 110,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $7.4 million, or approximately 7.4% of total
patient revenues in 1999. 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 development of new
dental centers and 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 are acquiring and managing dental practices. 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 and may have longer established relationships with buyers of
such services. The existence of other dental practice management companies may
also increase competition for acquisition candidates, thereby increasing amounts
that must be paid for acquired practice management businesses.

   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

                                       8
<PAGE>
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 the first quarter of 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.

   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

                                       9
<PAGE>
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.

   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

                                       10
<PAGE>
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, 1999, the Company and its affiliated dental practices
employed approximately 980 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 215 general dentists and 35 specialists on a full-time or
part-time basis. As a component of its acquisition strategy, the Company
frequently enters into employment or consulting agreements for ongoing
management and administrative services with the dentists from whom it acquires
affiliated practices. The Company believes that its relations with its employees
are good. The Company believes that it may need to hire additional personnel to
accommodate the demands prompted by the provision of services to each of the
affiliated practices under the management services agreements, as well as to
pursue its growth strategies.

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.

   All of the Company's existing centers are leased. Four 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 an

                                       11
<PAGE>
officer 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 2000 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 Count, 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.

   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. The transaction was not completed because at least one of the
contingencies required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations. At May 10, 2000, the arbitration proceeding
was underway.

   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.

   The Company carries insurance with coverage 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.

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
                                            ----        ---
   1998:

   First Quarter..........................  12.13       6.63
   Second Quarter.........................  13.44       9.25
   Third Quarter..........................  11.50       4.00
   Fourth Quarter.........................   9.25       4.00

   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

   As of May 16, 2000, 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 1,200 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 growth and 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
permits the payment of dividends only to the extent the Company maintains a
specified minimum net worth. The Company's net worth as of December 31, 1999 was
approximately $37.2 million. Any future change in the Company's dividend policy
will be made at the discretion of the Company's Board of Directors in light of
the financial condition, capital requirements, earnings and prospects of the
Company and any restrictions under credit agreements, as well as other factors
the Board of Directors may deem relevant.

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

                                       13
<PAGE>
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
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

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                   ------------------------------------------------------------
                                                     1995         1996         1997         1998         1999
                                                   --------     --------     --------     --------     --------
                                                               (in thousands, except per share date)
<S>                                                <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues ..........................    $ 18,257     $ 29,601     $ 46,225     $ 74,823     $102,701
Expenses:
  Dentist salaries and other professional costs       3,345        7,454       11,325       18,516       26,984
  Clinical salaries ...........................       1,879        6,760       10,248       16,612       21,408
  Dental supplies and laboratory fees .........       2,185        3,120        4,335        7,197        9,641
  Rental and lease expense ....................         836        1,592        2,590        4,091        6,203
  Advertising and marketing ...................         959        1,522        2,033        2,763        3,650
  Depreciation and amortization ...............         336        1,088        2,132        3,615        5,941
  Other operating expenses ....................       2,260        2,913        4,314        6,976       10,314
  General and administrative (1) ..............       9,109        4,292        5,929        8,145       10,909
                                                   --------     --------     --------     --------     --------
      Total expenses ..........................      20,909       28,741       42,906       67,915       95,050
                                                   --------     --------     --------     --------     --------
Operating income (loss) .......................      (2,652)         860        3,319        6,908        7,651
Litigation settlement .........................        --           --           --           --          1,366
Interest expense ..............................          87        2,596        2,792        1,889        4,220
Other (income) expense ........................        --            (89)         (84)         (57)          34
                                                   --------     --------     --------     --------     --------
Income (loss) before income taxes
  and extraordinary loss ......................      (2,739)      (1,647)         611        5,076        2,031
Provision (benefit) for income taxes (2) ......        (325)        (561)         200        1,490          835
                                                   --------     --------     --------     --------     --------
Income (loss) before extraordinary loss .......      (2,414)      (1,086)         411        3,586        1,196
Extraordinary loss ............................        --           --         (3,195)        --           --
                                                   --------     --------     --------     --------     --------
Net income (loss)(2) ..........................      (2,414)      (1,086)      (2,784)       3,586        1,196
Preferred stock dividends(3) ..................        --           --         (1,930)        --           --
                                                   --------     --------     --------     --------     --------
Net income (loss) attributable to common stock     $ (2,414)    $ (1,086)    $ (4,714)    $  3,586     $  1,196
                                                   ========     ========     ========     ========     ========
Income (loss) per common share:
  Basic and diluted:
    Income (loss) before extraordinary loss ...                 $  (0.34)    $   0.10     $   0.54     $   0.18
    Extraordinary loss ........................                     --          (0.78)        --           --
                                                                --------     --------     --------     --------
    Net income (loss) .........................                 $  (0.34)    $  (0.68)    $   0.54     $   0.18
                                                                ========     ========     ========     ========
 Weighted average number of common and
    common equivalent shares outstanding
       Basic ..................................                    3,191        4,100        6,586        6,825
                                                                ========     ========     ========     ========
       Diluted ................................                    3,191        4,132        6,608        6,850
                                                                ========     ========     ========     ========
</TABLE>

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                         ----------------------------------------------------------
                                           1995         1996         1997        1998        1999
                                         --------     --------     --------    --------    --------
                                                                 (in thousands)
BALANCE SHEET DATA:
<S>                                      <C>          <C>          <C>              <C>    <C>
Cash and cash equivalents ...........    $  6,439     $    119     $  2,908         695    $     59
Working capital (deficit) ...........       6,208       (3,244)       3,917      10,345      15,768
Total assets ........................      12,677       29,098       44,513     100,035     114,982
Long-term debt, less current portion        9,462       20,529        3,659      44,937      53,996
Redeemable preferred stock ..........       2,928        2,928        1,550        --          --
Total stockholders' equity (deficit)       (5,743)      (3,509)      31,113      36,397      37,163
</TABLE>

(1)   In 1995, the Company expensed $2.6 million of deferred compensation in
      connection with an acquisition.
(2)   Prior to 1996, the significant operations of the Company were conducted
      through a Subchapter S corporation and accordingly were not subject to
      federal and state income taxes. If all the Company's operations had been
      subject to income taxes, net loss would have been $1.7 million for the
      year ended December 31, 1995.
(3)   The Company recorded a $1.9 million non-cash dividend to accrete the
      Series A Convertible Preferred Stock and Series C Convertible Preferred
      Stock to their estimated fair value.


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

INTRODUCTION

   The Company 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, 1999, the Company provided management
services to 102 dental centers with approximately 250 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, 1999, the Company and its affiliated dental practices
maintained an aggregate of 70 capitated managed care contracts covering
approximately 110,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $7.4 million, or approximately 7.4% of total
patient

                                       16
<PAGE>
revenues in 1999. 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 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. The Company acquired Southwest Dental Associates
("SW Dental") of Austin, Texas in September 1997, and two individual practices
located in Fort Worth, Texas and Nashville, Tennessee in December 1997. 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 Dental Centers of America, Inc., which managed 16 dental centers
in San Antonio, Austin and Dallas/Fort Worth, Texas, and Crenshaw Family Dental
in Los Angeles. (All of the acquisitions in 1997 and 1998 are collectively
referred to as the "Completed Acquisitions").

                                       17
<PAGE>
                                                    YEAR ENDED DECEMBER 31,
                                                   -------------------------
                                                   1997      1998      1999
                                                   -----     -----     -----
Net patient revenues ..........................    100.0%    100.0%    100.0%
Expenses:
  Dentist salaries and other professional costs     24.5%     24.7%     26.3%
  Clinical salaries ...........................     22.2%     22.2%     20.8%
  Dental supplies and laboratory fees .........      9.4%      9.6%      9.4%
  Rental and lease expense ....................      5.6%      5.5%      6.0%
  Advertising and marketing ...................      4.4%      3.7%      3.6%
  Depreciation and amortization ...............      4.6%      4.8%      5.8%
  Other operating expenses ....................      9.3%      9.3%     10.0%
  General and administrative ..................     12.8%     10.9%     10.6%
                                                   -----     -----     -----
      Total expenses ..........................     92.8%     90.8%     92.6%
                                                   -----     -----     -----
Operating income ..............................      7.2%      9.2%      7.4%
Litigation settlement .........................     --        --         1.3%
Interest expense ..............................      6.0%      2.5%      4.1%
Other (income) expense ........................     -0.2%     -0.1%      0.0%
                                                   -----     -----     -----
Income before income taxes
  and extraordinary loss ......................      1.3%      6.8%      2.0%
Provision for income taxes ....................      0.4%      2.0%      0.8%
                                                   -----     -----     -----
Income before extraordinary loss ..............      0.9%      4.8%      1.2%
Extraordinary loss ............................     -6.9%      --        --
                                                   -----     -----     -----
Net income (loss) .............................     -6.0%      4.8%      1.2%
Preferred stock dividends .....................     -4.2%      --        --
                                                   -----     -----     -----
Net income (loss) attributable to common stock     -10.2%      4.8%      1.2%
                                                   =====     =====     =====


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, 1997 and
1998, 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.

                                       18
<PAGE>
   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 33.3%. 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.

   DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased from
$3.6 million for the year ended December 31, 1998 to $5.9 million for the year
ended December 31, 1999, an increase of $2.3 million or 64.3%, 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
4.8% to 5.8% for the years ended December 31, 1998 and 1999, respectively.

   OTHER OPERATING EXPENSES -- Other operating 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 expenses increased from 9.3% in 1998 to 10.0% 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 $1.9 million for the year
ended December 31, 1998 to $4.2 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.

                                       19
<PAGE>
   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. Management expects that the average tax rate in
future periods will be similar to the 1999 tax rate.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

   NET PATIENT REVENUES - Net patient revenues increased from $46.2 million for
the year ended December 31, 1997 to $74.8 million for the year ended December
31, 1998, an increase of $28.6 million or 61.9%. Approximately $19.7 million of
the increase was attributable to the Completed Acquisitions. Revenues from
twelve DE NOVO stores opened in 1997 and 1998 contributed patient revenues of
$5.0 million, or a 10.8% increase from 1997, while patient revenues from dental
centers open for more than one year increased $4.1 million, or 9.0%, in 1998.

   DENTIST SALARIES AND OTHER PROFESSIONAL COSTS -- Dentist salaries and other
professional costs increased from $11.3 million for the year ended December 31,
1997 to $18.5 million for the year ended December 31, 1998, an increase of $7.2
million or 63.5%. The Completed Acquisitions accounted for $4.9 million of the
increase in dentist salaries. Expressed as a percentage of net patient revenues,
dentist salaries increased from 24.5% to 24.7% for the years ended December 31,
1997 and 1998, respectively.

   CLINICAL SALARIES -- Clinical salaries increased from $10.2 million for the
year ended December 31, 1997 to $16.6 million for the year ended December 31,
1998, an increase of $6.4 million or 62.1%. The Completed Acquisitions accounted
for the increase in clinical salaries. Expressed as a percentage of patient
revenues, clinical salaries remained unchanged at 22.2% for the years ended
December 31, 1997 and 1998.

   DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $4.3 million for the year ended December 31, 1997 to $7.2 million
for the year ended December 31, 1998, an increase of $2.9 million or 66.0%. This
increase resulted primarily from the Completed Acquisitions, which incurred $2.2
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees increased from 9.4% in
1997 to 9.6% in 1998.

   RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from $2.6
million for the year ended December 31, 1997 to $4.1 million for the year ended
December 31, 1998, an increase of $1.5 million or 57.9%. Rental expense from the
Completed Acquisitions in Florida, California, and Texas accounted for $1.2
million of the increase with the balance resulting from the opening of ten new
dental centers in 1997 and 1998. Expressed as a percentage of patient revenues,
rental and lease expense decreased from 5.6% in 1997 to 5.5% in 1998.

   ADVERTISING AND MARKETING -- Advertising and marketing expense increased from
$2.0 million for the year ended December 31, 1997 to $2.8 million for the year
ended December 31, 1997, an increase of 35.9%. Expressed as a percentage of
patient revenues, advertising and marketing costs decreased, primarily due to
economies of scale, from 4.4% in 1997 to 3.7% in 1998.

   DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased from
$2.1 million for the year ended December 31, 1997 to $3.6 million for the year
ended December 31, 1998, an increase of $1.5 million or 69.6%, 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
4.6% to 4.8% for the years ended December 31, 1997 and 1998, respectively.

   OTHER OPERATING EXPENSES -- Other operating expenses increased from $4.3
million for the year ended December 31, 1997 to $7.0 million for the year ended
December 31, 1998, an increase of approximately $2.7 million or 61.7%. 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 1997 to 1998 resulted from

                                       20
<PAGE>
the Completed Acquisitions and the new dental centers opened during 1997 and
1998. Expressed as a percentage of revenues, however, other operating expenses
remained at 9.3%, for the years ended December 31, 1997 and 1998.

   GENERAL & ADMINISTRATIVE EXPENSE -- General and administrative expenses
increased from $5.9 million for the year ended December 31, 1997 to $8.1 million
for the year ended December 31, 1998, an increase of $2.2 million or 35.4%. The
increase resulted from the addition of general and administrative expenses of
the Completed Acquisitions 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
12.8% to 10.9% for the years ended December 31, 1997 and 1998, respectively, due
to relatively greater percentage increase in the Company's patient revenues.

   INTEREST EXPENSE -- Interest expense decreased from $2.8 million for the year
ended December 31, 1997 to $1.9 million for the year ended December 31, 1998. In
September and October 1997, the Company repaid approximately $23.9 million of
its outstanding debt with the net proceeds of the initial public offering of the
Company's common stock. Bank borrowings and the issuance of subordinated seller
notes increased from $5.2 million to $42.2 million, for the years ended December
31, 1997 and 1998, respectively.

   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, 1997, the Company
recorded a provision for income taxes of $200,000 resulting from the income
before income taxes and extraordinary loss of $611,000. The Company's average
tax rate for 1998 was 29.4%, compared to an average tax rate of 30.3% in 1997.
During 1998, the Company continued to realize benefits from net operating loss
carry forwards and other tax deductions not recognized in prior years.
Management expects that the average tax rate will be higher in future periods.

   PREFERRED STOCK DIVIDENDS -- Coincident with the completion of the initial
public offering in September 1997, the holders of the Company's Series A and
Series C Preferred Stock converted such shares into an aggregate of 948,243
shares of Company Common Stock. As a result, the Company recorded $1.9 million
in non-cash dividends in the third quarter 1997, representing the accretion of
the difference between the recorded value of the Preferred Stock and its
redemption value. No such expense was recorded in 1998.

LIQUIDITY AND CAPITAL RESOURCES

   Since 1996, the Company has relied on cash flow from operations and third
party borrowings to finance its operations, and on a combination of third party
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, 1999, the Company had net working capital of $15.8 million,
representing an increase of $5.5 million from net working capital of $10.3
million at December 31, 1998. Current assets at December 31, 1999 consisted of
cash of $59,000, billed and unbilled accounts receivable of $21.6 million,
deferred income taxes of $2.5 million, and prepaid expenses and other current
assets of $4.2 million. These were partially offset by current liabilities of
$12.6 million at December 31, 1999, consisting primarily of $9.9 million in
accounts payable and accrued liabilities, $2.2 million in current maturities of
long-term debt, and $526,000 in accrued deferred compensation payments.

   For the year ended December 31, 1999, net cash used in operating activities
was approximately $0.9 million, 2.8 million lower than net cash provided by
operating activities of $1.9 million for the prior year resulting from lower net
income of $2.4 million and changes in working capital, primarily accounts
receivable. During 1999, increases in accounts receivable of $7.7 million, net
of increased provision for bad debts, were partially offset by net income of
$1.2 million, deferred income taxes of $0.8 million and depreciation and
amortization of $6.0 million. Cash used in investing activities in 1999 totaled
approximately $10.4 million, primarily consisting of capital expenditures to
build new dental centers. Net cash provided by financing activities in 1999
amounted to approximately $10.6 million, primarily reflecting proceeds from bank
borrowings of $11.5 million utilized to fund capital expenditures and operating
activities during the year. The Company made principal payments of $1.5 million
on subordinated seller notes and other third-party debt in 1999.

   For the year ended December 31, 1998, net cash provided by operating
activities was approximately $1.9 million, compared to net cash used by
operating activities of $502,000 for the prior year, primarily as a result

                                       21
<PAGE>
of higher net income offset by increased working capital requirements. Cash used
in investing activities in 1998 totaled approximately $37.5 million, primarily
for the acquisition of dental practices and capital expenditures to build new
dental centers. Significant components of cash used in investing activities
included $30.8 million to complete the acquisitions of Dental Consulting
Services in Los Angeles, Dental World, Inc. in Houston, Dentcor Inc./Woolf &
Associates P.A. in Florida, Dental Centers of America in San Antonio, and three
individual practices in Los Angeles and $6.7 million in capital expenditures for
new dental centers and computer systems and software. Cash provided by financing
activities in 1998 amounted to approximately $33.4 million. Significant
components of cash provided by financing activities included bank borrowings of
$37.0 million utilized to finance the acquisitions completed in 1998. During
1998, the Company made principal payments of $3.3 million on its bank credit
facility, subordinated seller notes and other third-party debt.

   The Company's principal sources of liquidity as of December 31, 1999
consisted primarily of cash and net accounts receivable. At year-end, there was
less than $500,000 available to borrow under the Company's bank credit facility.
In January 2000, the Company amended its bank credit agreement ("Credit
Agreement") with its existing bank and entered into a senior subordinated note
agreement (Subordinated Note Agreement) and a subordinated convertible note
agreement (Convertible Note Agreement) with two lenders. In March 2000, the
Company advised its lenders under the bank credit facility that it was in
violation of certain financial covenants of the Credit Agreement. Accordingly,
in May 2000, the Company again amended its credit facility to cure its covenant
violations and to provide additional availability for the Company to complete
the DE NOVO dental centers that are under development for 2000.

   The Credit Agreement provides for borrowings up to $55.0 million and matures
November 2002. Advances under the bank credit facility 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 bank credit facility 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 bank credit facility. 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 bank credit facility contains affirmative and
negative covenants that require that Company to maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends. In addition, under the May 2000
amended Credit Agreement, capital expenditures for 2000 are limited to no more
than $3.5 million, acquisitions are not permitted in 2000, and the payment of
any litigation settlement is restricted to no more than $100,000, without
consent of the lenders. At September 30, 1999, the Company received waivers
concerning violations of certain financial covenants under the Credit Agreement.
At December 31, 1999, $50.9 million was outstanding under the bank credit
facility and the average interest rate on the Company's bank borrowings was
9.8%. At May 10, 2000, bank borrowings were $43.5 million and the average
interest rate had increased to 11.2%.

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

                                       22
<PAGE>
   During 1999, the Company did not acquire any significant dental practices as
development was concentrated on the addition of 20 de novo dental centers.
During 1998, the Company acquired dental management companies and dental
practices operating 36 dental centers in Texas, Florida and California. Total
purchase consideration for the acquisitions amounted to $41.7 million, including
related acquisition expenses and excluding assumed liabilities, consisting of
$30.8 million in cash, $4.5 million in subordinated seller notes and 595,421
shares of Company stock and common stock equivalents (see "Recent Sales of
Unregistered Securities"). The Company does not anticipate making any
acquisitions in 2000 due to its emphasis on DE NOVO development of dental
centers and limitations under its bank credit facility. At December 31, 1999 the
Company had four dental centers under construction with leases committed on an
additional seven locations. Development of eight centers is anticipated to be
completed during the first seven months of 2000 subject to the availability of
funds generated by cash flow from operations or from the bank credit facility.
The Company has deferred construction of three new dental centers until 2001 and
will be required to incur lease expenses for these facilities unless subleases
are obtained. Capital expenditures in 2000 are expected to be approximately $3.5
million.

   Management believes that cash flow from operations and borrowings available
under the bank credit facility should be sufficient to meet its anticipated
capital expenditures and other operating requirements for the next 12 months.
However, because future cash flows and the availability of financing are subject
to a number of variables, such as the level of capital spending, the Company's
financial performance and other factors, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures or to fund future acquisitions. Additional debt
and equity financing may be required for the Company to fund its DE NOVO
development plans and to support operations. The availability of these capital
sources will depend on prevailing market conditions and interest rates and the
then-existing financial condition of the Company.

   YEAR 2000

   The year 2000 issue is the result of computer programs using two digits to
define the applicable year instead of four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or in extreme situations, system failure
could result.

   During 1998 and 1999, as part of the Company's continuing program to upgrade
its information systems in anticipation of future growth, the Company installed
year 2000 compliant software for its corporate and regional operations. This
installation was completed prior to December 31, 1999 and the Company has not
experienced, nor does it anticipate, any significant disruptions in any of its
computer systems or its operations as a result of the Y2K problem.

   To date, the incremental costs incurred by the Company that relate solely to
the year 2000 compliance problem have not been and are not expected to be
material. These costs are exclusive of upgrades made to the Company's systems in
the ordinary course of business and consist primarily of internal employee time.
The Company did not separately track the internal costs incurred for the Year
2000 project, which consisted primarily of payroll and related costs associated
with employee time. Based upon the Company's current assessments, the costs of
the Company's year 2000 compliance program did not have a material effect on the
Company's financial condition, results of operations or cash flows.

   INFLATION

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

   ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The Company's only financial instruments with market risk exposure are
revolving credit borrowings under its Credit Agreement which total $50.9 million
at December 31, 1999. Based on this balance, a change of one percent in the
interest rate would cause a change in interest expense of approximately
$509,000, or $0.04 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

                                       23
<PAGE>
interest rate.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

   None.

                                       24
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


                                                                        DIRECTOR
         NAME              AGE      POSITION WITH THE COMPANY             SINCE
-------------------------------------------------------------------------------
   Jack H. Castle, Jr.      45    Chairman of the Board and Chief
                                    Executive Officer                      1995
   Jack H. Castle, D.D.S.   78    Director                                 1995
   Robert J. Cresci (1)(2)  56    Director                                 1995
   G. Kent Kahle (1)        48    Director                                 1995
   Elizabeth A. Tilney(2)   42    Director                                 1996
   Emmett E. Moore(1)       58    Director                                 1997
   G. Daniel Siewert III    56    President and Chief Operating Officer
   John M. Slack            52    Vice President and Chief Financial
                                    Officer
   ------------------------
   (1) Member of the Audit Committee.
   (2) Member of the Compensation Committee.

   Jack H. Castle, Jr. became a director in December 1995. He was a co-founder
of the Company in 1981 and has served as Chief Executive Officer since 1990. He
became the Company's Chairman in August 1996. Mr. Castle received a B.A. from
Rollins College and a Masters of Business Administration from Wake Forest
University. Mr. Castle is the son of Jack H. Castle, D.D.S.

   Jack H. Castle, D.D.S. became a director in December 1995 and served as
Chairman of the Company from 1981 until August 1996. He is also the sole owner
of Jack H. Castle, D.D.S., P.C., a dental practice managed by the Company (the
"Texas PC"). Prior to co-founding the Company, Dr. Castle operated a single
location dental practice. Dr. Castle graduated from the University of Houston in
1943 and received a Doctorate of Dental Surgery from the University of Texas
Health Science Center in Houston in 1945. He served in the United States Navy
from 1947 to 1949. Dr. Castle is the father of Jack H. Castle, Jr.

   Robert J. Cresci became a director in December 1995. Mr. Cresci has been a
Managing Director of Pecks Management Partners Ltd., an investment management
firm, since September 1990. Mr. Cresci currently serves on the boards of
Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Quest Educational
Corporation, Jfax.Com, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc., E-Stamp
Corporation and several private companies.

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

   Elizabeth A. Tilney became a director in August 1996. Ms. Tilney is Senior
Vice President, Marketing, Communications and Human Resources of Enron Energy
Services, having joined Enron in March 1996. From 1987 to 1996, Ms. Tilney held
various positions with Russell Reynolds Associates, an executive search firm,

                                       25
<PAGE>
and was most recently an Executive Director. Ms. Tilney was an account manager
associated with Ogilvy & Mather Advertising in New York and Houston from 1983 to
1987. Ms. Tilney has a Masters of Business Administration from The Amos Tuck
School of Business Administration of Dartmouth College and a B.A. from the
University of Virginia.

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

   G. Daniel Siewert III joined the Company in August 1997 as President and
Chief Operating Officer. From January 1995 through June 1997, he served as Chief
Operating Officer for Family Dental Center, Inc., a large group dental practice
with locations in Sears Roebuck & Company stores. From November 1993 to December
1994, Mr. Siewert provided business management consulting for a major retail eye
care company. Prior to that, from September 1990 until August 1993, he was Chief
Executive Officer of National Vision Associates, Inc.

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

                      COMPLIANCE WITH SECTION 16(A) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

   Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons holding more than ten percent of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission ("SEC") and any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted (i) initial reports of
ownership, (ii) reports of changes in ownership and (iii) annual reports of
ownership of Common Stock and other equity securities of the Company. Such
directors, officers and ten-percent stockholders are also required to furnish
the Company with copies of all such filed reports.

   Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1999, the Company believes that all of the Company's executive officers and
directors complied with Section 16(a) reporting requirements during 1999.

                                       26
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

   The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and each of the
other executive officers of the Company (the "Named Executive Officers") whose
compensation exceeded $100,000 during the year ended December 31, 1999.

<TABLE>
<CAPTION>
                                          ANNUAL COMPENSATION              LONG-TERM COMPENSATION
                                                         OTHER ANNUAL RESTRICTED NUMBER OF  ALL OTHER
                                         SALARY   BONUS  COMPENSATION   STOCK     OPTIONS  COMPENSATION
NAME AND PRINCIPAL POSITION      YEAR     ($)      ($)        $         AWARDS    GRANTED      ($)(1)
---------------------------     ------  -------   -----  ------------   ------    -------  ------------
<S>                              <C>    <C>                                        <C>        <C>
Jack H. Castle, Jr.              1999   249,925     --         --          --      75,000     3,504
Chief Executive Officer          1998   243,663     --         --          --      75,000    12,388
                                 1997   254,167     --         --          --     100,000      --

G. Daniel Siewert III            1999   199,929     --         --          --      75,000    12,000
President & Chief Operating      1998   199,320     --         --          --      75,000    12,000
  Officer                        1997    61,698(2)  --         --          --     110,000      --

John M. Slack                    1999   144,231     --         --          --      50,000     7,407
Vice President, Chief Financial  1998   142,026     --         --          --      50,000      --
  Officer, Treasurer             1997   120,001     --         --          --      30,000      --
  and Secretary
</TABLE>

   (1)  Other compensation paid to Mr. Castle, Mr. Siewert and Mr. Slack in 1999
        and 1998 consisted of automobile allowances.

   (2)  Represents less than one full year's compensation; pursuant to agreement
        between the officer and the Company, such officer's employment began on
        August 4, 1997.

                                  STOCK OPTIONS

   The following table reflects certain information regarding stock options
granted to the Named Executive Officers during 1999.



                              OPTION GRANTS IN 1999

<TABLE>
<CAPTION>
                                INDIVIDUAL GRANTS
                     --------------------------------------------



                                                                           POTENTIAL REALIZABLE VALUE AT
                     NUMBER OF                                               ASSUMED ANNUAL RATES OF
                     SECURITIES                                              STOCK PRICE APPRECIATION
                     UNDERLYING   PERCENT OF TOTAL                               FOR OPTION TERM
                       OPTIONS    OPTIONS GRANTED TO  EXERCISE EXPIRATION  -----------------------------
        NAME           GRANTED    EMPLOYEES IN 1999    PRICE      DATE       5%($)           10%($)
        ----           -------    ------------------  -------  ----------  --------         --------
<S>                    <C>             <C>            <C>       <C>   <C>  <C>              <C>
Jack H. Castle, Jr.    75,000          29.7%          $2.3125   11/07/08   $109,074         $276,415
G. Daniel Siewert III  75,000          29.7%          $2.3125   11/07/08   $109,074         $267,415
John M. Slack          50,000          19.8%          $2.3125   11/07/08   $ 72,716         $184,276
</TABLE>


                                       27
<PAGE>
      AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END 1999 OPTION VALUES

   The following table reflects certain information concerning the number of
unexercised options held by the Named Executive Officers and the value of such
officers' unexercised options as of December 31, 1999. No options were exercised
by the Named Executive Officers during the year ended December 31, 1999.



<TABLE>
<CAPTION>
                                                           NUMBER OF              VALUE OF UNEXERCISED
                                                      UNEXERCISED OPTIONS       "IN THE MONEY" OPTIONS
                       SHARES                       AT DECEMBER 31, 1999 (#)     AT DECEMBER 31, 1999(1)
                     ACQUIRED ON                  ---------------------------  ----------------------------
   NAME                EXERCISE   VALUE REALIZED  EXERCISABLE   UNEXERCISABLE  EXERCISABLE    UNEXERCISABLE
   ----                --------   --------------  -----------   -------------  -----------    -------------
<S>                        <C>        <C>            <C>           <C>              <C>           <C>
Jack H. Castle, Jr.        -          -              58,750        191,250          -             $51,563
G. Daniel Siewert III      -          -              68,750        191,250          -             $51,563
John M. Slack              -          -              36,500        113,500          -             $34,375
</TABLE>

   (1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price of
the options granted to the Named Executive Officers ranges from $2.3125 to
$10.00 per share. The value of unexercised options for each of the Named
Executive Officers represents the difference between the exercise price of such
options and the closing price of the Company's Common Stock on December 31, 1999
($3.00 per share). None of the "in-the-money" options granted to the Named
Executive Officers were exercisable at December 31, 1999.

                                       28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following table sets forth information as of March 31, 2000 with respect
to beneficial ownership of the Company's Common Stock by (i) each director, (ii)
each executive officer, (iii) the executive officers and directors as a group,
and (iv) each person known to the Company who beneficially owns 5% or more of
the outstanding shares of its voting securities. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.

<TABLE>
<CAPTION>
                                                         NUMBER OF    PERCENTAGE
                                                          SHARES       OF SHARES
                  NAME AND ADDRESS OF                  BENEFICIALLY   BENEFICIALLY
                   BENEFICIAL OWNER                        OWNED         OWNED
                   ----------------                        -----         -----
<S>                    <C>                                <C>            <C>
   Jack H. Castle, Jr. (1)(2).........................    1,386,75       22.4%

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

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

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

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

   Robert J. Cresci (5)...............................     923,243       14.4

   The Capital Group Companies, Inc.
   333 South Hope Street
   Los Angeles, California 90071.....................      625,000        9.7

   Benson Associates, LLC
   111 S.W. Fifth Avenue, Suite 2130
   Portland, Oregon 97204.............................     542,900        8.5

   G. Kent Kahle (6)..................................      75,329        1.2

   G. Daniel Siewert III (7)..........................     110,600        1.7

   John M. Slack (8)..................................      51,000          *

   Elizabeth A. Tilney (9)............................      13,000          *

   Emmett E. Moore (9)................................      10,000          *

   All directors and executive  officers as a group (8
     persons) (10)....................................   3,029,922       45.4%

</TABLE>

   *  Less than 1%

(1)  Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
     Castle, Jr., of which Mr. Castle is Trustee. Includes options to acquire
     58,750 shares of Common Stock issued under the Castle Dental Centers, Inc.
     Omnibus Stock and Incentive Plan (the "Plan") which are exercisable within
     60 days. Excludes options to acquire 191,250 shares of Common Stock which
     are not exercisable within 60 days.

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

                                       29
<PAGE>
(3)  Includes 103,000 shares of Common Stock owned jointly by Jack H. Castle,
     D.D.S. and Loretta Castle.

(4)  Includes 615,033, 121,708, and 176,502 shares of Common Stock owned of
     record by Delaware State Employees' Retirement Fund, Declaration of Trust
     for Defined Benefit Plans of ICI American Holdings Inc. and Declaration of
     Trust for Defined Benefit Plans of Zeneca Holdings Inc., respectively (the
     "Pecks Investors"). Pecks Management Partners Ltd. ("Pecks"), as investment
     manager for the Pecks Investors, has sole investment and voting power with
     respect to such shares. Mr. Cresci, a director of the Company, is a
     Managing Director of Pecks. Pecks disclaims beneficial ownership of such
     shares.

(5)  Includes all shares deemed to be beneficially owned by Pecks, of which Mr.
     Cresci is a Managing Director. As a result, Mr. Cresci may be deemed to
     share voting and investment power with respect to such shares. Mr. Cresci
     disclaims beneficial ownership of such shares. See note 4 above. Also
     includes options to acquire 10,000 shares of Common Stock under the
     Directors' Plan which are exercisable within 60 days. Excludes options to
     acquire 15,000 shares of Common Stock which are not exercisable within 60
     days.

(6)  Includes 56,579 shares of Common Stock issuable on exercise of the GulfStar
     Warrant and options to acquire 12,500 shares of Common Stock under the
     Directors' Plan which are exercisable within 60 days. Mr. Kahle is a
     Managing Director of The GulfStar Group, Inc., an affiliate of GulfStar
     Investments, Ltd., the holder of the GulfStar Warrant. Excludes options to
     acquire 22,500 shares of Common Stock which are not exercisable within 60
     days.

(7)  Includes options to acquire 68,750 shares of Common Stock issued under the
     Plan which are exercisable within 60 days. Excludes options to acquire
     191,250 shares of Common Stock which are not exercisable within 60 days.

(8)  Includes options to acquire 36,500 shares of Common Stock issued under the
     Plan which are exercisable within 60 days. Excludes options to acquire
     113,500 shares of Common Stock which are not exercisable within 60 days.

(9)  Includes options to acquire 10,000 shares of Common Stock issued under the
     Plan which are exercisable within 60 days. Excludes options to acquire
     15,000 shares of Common Stock which are not exercisable within 60 days.

(10) Includes (i) 714,000 shares of Common Stock held by the Castle 1995 Gift
     Trust f/b/o Jack H. Castle, Jr., (ii) 514,000 shares of Common Stock held
     by Castle Interests, Ltd., (iii) 913,243 shares of Common Stock
     beneficially owned by the Pecks Investors, and (iv) 56,579 shares of Common
     Stock issuable to GulfStar Investments, Ltd. on exercise of the GulfStar
     Warrant.

                                       30
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Mr. Kahle, a director of the Company, is a Managing Director of The GulfStar
Group, Inc., which has provided investment banking and advisory services to the
Company. In 1995, the Company paid $540,000 in investment banking fees to The
GulfStar Group, Inc. and issued a warrant to purchase 56,579 shares of Common
Stock to GulfStar Investments, Ltd. The Company has paid The GulfStar Group,
Inc. for investment banking and financial advisory services provided to the
Company in connection with certain acquisitions. The GulfStar Group, Inc.
received approximately $198,000 in investment banking and financial advisory
fees from the Company in 1996. In 1998, The GulfStar Group, Inc. received a
$183,332 advisory fee in connection with the acquisition of Dental Consulting
Services, LLC. The directors of the Company other than Mr. Kahle approve the
payments made to The GulfStar Group, Inc. by the Company.

   At December 31,1999, Jack H. Castle, Jr., the Company's Chief Executive
Officer, G. Daniel Siewert, the Company's President and Chief Operating Officer,
and John M. Slack, Vice-President and Chief Financial Officer, had outstanding
loans in the aggregate amount of $307,000 from the Company. These loans are
repayable over varying periods ranging from one to five years and bear interest
at rates ranging from zero to six percent.

   Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
owns 948,243 shares of Common Stock. Pursuant to the provisions of the
Stockholders Agreement (as defined below), for so long as certain ownership
thresholds with respect to the Common Stock are maintained, the Signatory
Stockholders (as defined below) are obligated to vote their shares of Common
Stock in favor of the designee of the Pecks Investors to be a member of the
Company's board of directors and Mr. Cresci is currently such nominee.

   In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Jack H. Castle, D.D.S., a
director of the Company, was the sole owner. In connection with that
transaction, the Company paid Jack H. Castle, D.D.S. $6.0 million in cash and
entered into a Deferred Compensation Agreement with Jack H. Castle, D.D.S.
pursuant to which the Company has agreed to pay Jack H. Castle, D.D.S. $2.6
million in 20 quarterly installments of $131,500 beginning March 1996 and ending
in December 2000.

   In connection with the purchase of the stock of Jack H. Castle, D.D.S., Inc.,
the Company also entered into a management services agreement with Jack H.
Castle, D.D.S., P.C., a professional corporation of which Jack H. Castle, D.D.S.
is the sole owner. Pursuant to the management services agreement, Jack H.
Castle, D.D.S., P.C. receives an annual payment of $100,000 for services
performed in connection therewith. The professional corporation employs or
contracts with all of the dental professionals practicing at the Company's
dental offices in Texas under the Management Agreement. The Company provides the
professional corporation with, among other things, equipment, supplies, support
services, non-dental personnel, office space, management, administration,
financial record keeping and reporting services. The Management Agreement is for
a term of 25 years, with automatic renewal thereafter.

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

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

   The Company is party to a lease agreement with Goforth, Inc., a company owned
by Jack H. Castle, Jr., the Company's Chairman and Chief Executive Officer. The
lease agreement relates to the Castle Dental Center located at 2101 West Loop
South in Houston, Texas, a 6,781 square foot free-standing building. The

                                       31
<PAGE>
Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of $12,000
per month through January 2001 and $13,200 per month from January 2001 through
January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.

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

                                       32
<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:
                                                                     PAGE
                                                                     ----
   Report of Independent Accountants..............................   F-2

   Consolidated Balance Sheets as of December 31, 1998 and 1999...   F-3

   Consolidated Statements of Operations for the Years
      Ended December 31, 1997, 1998 and 1999......................   F-4

   Consolidated Statements of Changes in Stockholders' Equity
      for the Years Ended December 31, 1997, 1998 and 1999........   F-5

   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 1997, 1998 and 1999............................   F-6

   Notes to Financial Statements..................................   F-7

   (a)(2)  FINANCIAL STATEMENT SCHEDULES

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

                                                                     PAGE
                                                                     ----
   Report of Independent Accountants on Financial
      Statement Schedule..........................................   S-1
   Financial Statement Schedule
      II -- Valuation and Qualifying Accounts.....................   S-2

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

   (a)(3)  EXHIBITS

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

   (b)   REPORTS ON FORM 8-K

        NONE

                                       33
<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 May 19, 2000.

                                             CASTLE DENTAL CENTERS, INC.

                                             By: /s/ JACK H. CASTLE, JR.
                                                 ----------------------------
                                                     JACK H. CASTLE, JR.
                                                     CHAIRMAN OF THE BOARD AND
                                                     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 Jack H. Castle, Jr.
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, 1999, 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, Chief         May 19, 2000
      ---------------------------------  Executive Officer (Principal
              JACK H. CASTLE, JR.        Executive Officer)


        /s/   G. DANIEL SIEWERT          President, Chief Operating Officer   May 19, 2000
      ---------------------------------
              G. DANIEL SIEWERT

        /s/   JOHN M. SLACK              Vice President -- Chief Financial    May 19, 2000
      ---------------------------------
              JOHN M. SLACK              Officer (Principal Financial and     May 19, 2000
                                         Accounting Officer)

        /s/   JACK H. CASTLE, D.D.S.     Director                             May 19, 2000
      ---------------------------------
              JACK H. CASTLE, D.D.S.

        /s/   G. KENT KAHLE              Director                             May 19, 2000
      ---------------------------------
              G. KENT KAHLE

        /s/   ROBERT J. CRESCI           Director                             May 19, 2000
      ---------------------------------
              ROBERT J. CRESCI

        /s/   ELIZABETH A. TILNEY        Director                             May 19, 2000
      ---------------------------------
              ELIZABETH A. TILNEY

        /s/   EMMETT E. MOORE            Director                             May 19, 2000
      ---------------------------------
              EMMETT E. MOORE
</TABLE>

                                       34
<PAGE>
                           CASTLE DENTAL CENTERS, INC.
                          INDEX TO FINANCIAL STATEMENTS
                                                                         PAGE
                                                                         ----
AUDITED FINANCIAL STATEMENTS

   Report of Independent Accountants......................................F-2

   Consolidated Balance Sheets as of December 31, 1998 and 1999...........F-3

   Consolidated Statements of Operations for the years ended
     December 31, 1997, 1998 and 1999.....................................F-4

   Consolidated Statements of Changes in Stockholders' Equity
     (Deficit) for the years ended December 31, 1997, 1998 and 1999.......F-5

   Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1998 and 1999.....................................F-6

   Notes to Financial Statements..........................................F-7

                                      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 balance sheets and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Castle Dental Centers, Inc. at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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, 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 the opinion expressed above.




April 26, 2000,
except for the second paragraph of Note 4,
as to which the date is May 19, 2000.
Houston, Texas


                                      F-2
<PAGE>
                           CASTLE DENTAL CENTERS, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                  -----------------------
                                                                                    1998          1999
                                                                                  ---------     ---------
                                      ASSETS
<S>                                                                               <C>           <C>
Current assets:
  Cash and cash equivalents ..................................................    $     695     $      59
  Patient receivables, net of allowance for uncollectible accounts of
    $8,508 and $13,588 in 1998 and 1999, respectively ........................       10,700        16,928
  Unbilled patient receivables, net of allowance for uncollectible accounts of
    $658 and $904 in 1998 and 1999, respectively .............................        3,251         4,667
  Prepaid expenses and other current assets ..................................        2,887         4,199
  Deferred income taxes ......................................................        1,809         2,488
                                                                                  ---------     ---------
              Total current assets ...........................................       19,342        28,341
                                                                                  ---------     ---------
  Property and equipment, net ................................................       13,861        20,361
  Intangibles, net ...........................................................       65,956        64,020
  Other assets ...............................................................          876         2,260
                                                                                  ---------     ---------
              Total assets ...................................................    $ 100,035     $ 114,982
                                                                                  =========     =========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt ..........................................    $   1,795     $   2,192
  Accounts payable and accrued liabilities ...................................        6,676         9,855
  Deferred compensation payable, related party ...............................          526           526
                                                                                  ---------     ---------
              Total current liabilities ......................................        8,997        12,573
                                                                                  ---------     ---------

Long-term debt, net of current portion .......................................       44,411        53,996
Other long-term liabilities, related party ...................................          526          --
Deferred income taxes ........................................................        5,401         6,896
Minority interest ............................................................        4,303         4,354
Commitments and contingencies
Stockholders' equity:
  Common stock, $.001 par value, 30,000,000 shares authorized,
  6,417,206 shares issued and outstanding in 1998 and 1999 ...................            6             6
  Additional paid-in capital .................................................       42,516        42,086
  Accumulated deficit ........................................................       (6,125)       (4,929)
                                                                                  ---------     ---------
              Total stockholders' equity .....................................       36,397        37,163
                                                                                  ---------     ---------
              Total liabilities and stockholders' equity .....................    $ 100,035     $ 114,982
                                                                                  =========     =========
</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,
                                                   ----------------------------------
                                                     1997         1998         1999
                                                   --------     --------     --------
<S>                                                <C>          <C>          <C>
Net patient revenues ..........................    $ 46,225     $ 74,823     $102,701
Expenses:
  Dentist salaries and other professional costs      11,325       18,516       26,984
  Clinical salaries ...........................      10,248       16,612       21,408
  Dental supplies and laboratory fees .........       4,335        7,197        9,641
  Rental and lease expense ....................       2,590        4,091        6,203
  Advertising and marketing ...................       2,033        2,763        3,650
  Depreciation and amortization ...............       2,132        3,615        5,941
  Other operating expenses ....................       4,314        6,976       10,314
  General and administrative ..................       5,929        8,145       10,909
                                                   --------     --------     --------
      Total expenses ..........................      42,906       67,915       95,050
                                                   --------     --------     --------
Operating income ..............................       3,319        6,908        7,651
Litigation settlement .........................        --           --          1,366
Interest expense ..............................       2,792        1,889        4,220
Other (income) expense ........................         (84)         (57)          34
                                                   --------     --------     --------
Income before income taxes
  and extraordinary loss ......................         611        5,076        2,031
Provision for income taxes ....................         200        1,490          835
                                                   --------     --------     --------
Income before extraordinary loss ..............         411        3,586        1,196
Extraordinary loss ............................      (3,195)        --           --
                                                   --------     --------     --------
Net income (loss) .............................      (2,784)       3,586        1,196
Preferred stock dividends .....................      (1,930)        --           --
                                                   --------     --------     --------
Net income (loss) attributable to common stock     $ (4,714)    $  3,586     $  1,196
                                                   ========     ========     ========

Income (loss) per common share:
  Basic and diluted:
    Income before extraordinary loss ..........    $   0.10     $   0.54     $   0.18
    Extraordinary loss ........................       (0.78)        --           --
                                                   --------     --------     --------
      Net income (loss) .......................    $  (0.68)    $   0.54     $   0.18
                                                   ========     ========     ========
Weighted average number of common and
common equivalent shares outstanding
  Basic .......................................       4,100        6,586        6,825
                                                   ========     ========     ========
  Diluted .....................................       4,132        6,608        6,850
                                                   ========     ========     ========
</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 (DEFICIT)
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                    ADDITIONAL                STOCKHOLDERS'
                                              COMMON STOCK           PAID-IN     ACCUMULATED     EQUITY
                                            SHARES      AMOUNT       CAPITAL       DEFICIT      (DEFICIT)
                                          ---------    ---------    ---------     ---------     ---------
<S>              <C>                      <C>          <C>          <C>           <C>           <C>
Balance, January 1, 1997 ...............  2,331,996    $       2    $   3,416     $  (6,927)    $  (3,509)
    Issuance of common stock - Initial
       Public Offering .................  2,784,000            3       31,743          --          31,746
    Conversion of Series A Preferred
       Stock ...........................    705,552            1        3,228          --           3,229
    Conversion of Series C Preferred
       Stock ...........................    242,691         --          2,670          --           2,670
    Issuance of common stock in
       connection with an acquisition ..    165,000         --          1,691          --           1,691
    Accretion of discount on
       preferred stock .................       --           --         (1,930)         --          (1,930)
    Net loss ...........................       --           --           --          (2,784)       (2,784)
                                          ---------    ---------    ---------     ---------     ---------
Balance, December 31, 1997 .............  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
                                          =========    =========    =========     =========     =========
</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,
                                                                      ----------------------------------
                                                                        1997         1998         1999
                                                                      --------     --------     --------
<S>                                                                   <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss) ................................................    $ (2,784)    $  3,586     $  1,196
  Adjustments:
    Provisions for bad debts .....................................       1,897        2,545        4,160
    Depreciation and amortization ................................       2,132        3,615        5,960
    Amortization of debt discount ................................         712         --           --
    Minority interest ............................................        --           --             51
    Deferred income taxes ........................................         100        1,568          816
    Extraordinary loss ...........................................       3,195         --           --
    Changes in operating assets and liabilities:
      Patient receivables ........................................      (3,654)      (5,864)     (10,142)
      Unbilled patient receivables ...............................      (1,046)        (615)      (1,662)
      Prepaid expenses and other current assets ..................        (651)      (1,957)      (1,312)
      Other assets ...............................................         (18)         (45)      (1,372)
      Accounts payable and accrued liabilities ...................         272         (278)       1,931
      Deferred compensation payments to related party ............        (657)        (657)        (526)
                                                                      --------     --------     --------
          Net cash provided by (used in) operating activities ....        (502)       1,898         (900)
                                                                      --------     --------     --------

Cash flows used in investing activities:
  Capital expenditures ...........................................      (1,515)      (6,660)      (9,503)
  Acquisition of affiliated dental practices, net of cash acquired      (5,015)     (30,818)        (667)
  Non-competition agreements .....................................        --           --           (205)
                                                                      --------     --------     --------
          Net cash used in investing activities ..................      (6,530)     (37,478)     (10,375)
                                                                      --------     --------     --------

Cash flows from financing activities:
  Proceeds from issuance of common stock .........................      33,659         --           --
  Proceeds from debt .............................................       2,074       37,000       11,460
  Repayment of debt ..............................................     (24,376)      (3,341)      (1,478)
  Bank overdraft .................................................        --           --            818
  Offering costs .................................................      (1,263)        --           --
  Debt and preferred stock issuance costs ........................        (273)        (292)        (161)
                                                                      --------     --------     --------
          Net cash provided by financing activities ..............       9,821       33,367       10,639
                                                                      --------     --------     --------

Net change in cash and cash equivalents ..........................       2,789       (2,213)        (636)
Cash and cash equivalents, beginning of period ...................         119        2,908          695
                                                                      --------     --------     --------
Cash and cash equivalents, end of period .........................    $  2,908     $    695     $     59
                                                                      ========     ========     ========
</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:

    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 professional corporation at
a nominal cost ("nominee arrangements"). At December 31, 1999, all of the
affiliated dental practices were wholly-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

                                       F-7
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


services recognized ratably over the remainder of the contract. Billings under
each contract, which average approximately 24 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 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. Fees from capitated contracts totaled $5.1 million and $7.4
million in 1998 and 1999, 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.

    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

    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

                                       F-8
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


management services agreements acquired through December 31, 1999 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 noncompete agreements with the dentist, or directly contract
with payors, the intangible asset created in the purchase allocation process is
associated primarily with the management services agreement with the affiliated
dental practice.

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

    OTHER ASSETS

    Other assets consist primarily of debt issuance costs and other receivables.
The costs related to the issuance of debt are capitalized and amortized using
the effective interest method over the lives of the related debt. Other
receivables include $339,000 and $238,000 at December 31, 1998 and 1999,
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.

    PRE-OPENING COSTS

    Facility costs incurred prior to opening a dental center are capitalized and
amortized over the life of the lease. All other costs, primarily salaries, 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.

                                       F-9
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


2.  SELECTED BALANCE SHEET INFORMATION:

    The details of certain balance sheet accounts were as follows:

                                                             DECEMBER 31,
                                                       ----------------------
                                                         1998           1999
                                                       -------        -------
                                                           (in thousands)
Property and equipment:
    Equipment ....................................     $ 9,334        $13,644
    Leasehold improvements .......................       6,529          9,265
    Furniture and fixtures .......................       1,553          2,009
    Vehicles .....................................         130            132
    Construction-in-progress .....................       1,213          3,213
                                                       -------        -------
            Total property and equipment .........      18,759         28,263
    Less accumulated depreciation ................       4,898          7,902
                                                       -------        -------
            Property and equipment, net ..........     $13,861        $20,361
                                                       =======        =======

    Depreciation expense was approximately $1.2 million, $1.8 million and $3.0
million for the years ended December 31, 1997, 1998 and 1999, respectively.
Capitalized interest cost was $329,000 for the year ended December 31, 1999.
There were no amounts capitalized during 1997 and 1998. Fully depreciated assets
in use as of December 31, 1998 and 1999 were approximately $1.2 million and $1.3
million, respectively.

                                                           DECEMBER 31,
                                                      -----------------------
                                                        1998            1999
                                                      -------         -------
                                                          (in thousands)
Intangible assets:
    Management services agreements .............      $68,584         $69,251
    Other ......................................          150             355
                                                      -------         -------
        Total intangilbe assets ................       68,734          69,606
Less accumulated amortization ..................        2,778           5,586
                                                      -------         -------
        Intangible assets, net .................      $65,956         $64,020
                                                      =======         =======

    Amortization expense was approximately $900,000, $1.8 million and $2.8
million for the years ended December 31, 1997, 1998 and 1999, respectively.

                                                                  DECEMBER 31,
                                                               -----------------
                                                                1998       1999
                                                               ------     ------
                                                                 (in thousands)
Accounts payable and accrued liabilities:
    Bank overdraft .........................................   $ --       $  818
    Trade ..................................................    3,083      3,792
    Salaries, wages and payroll taxes ......................    1,959      2,021
    Due to patients ........................................    1,420      1,772
    Legal ..................................................     --          991
    Other ..................................................      214        461
                                                               ------     ------
            Total accounts payable and accrued liabilities .   $6,676     $9,855
                                                               ======     ======

                                      F-10
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


3.  ACQUISITIONS:

    In March 1998, the Company acquired all the outstanding capital stock of
Dental World, Inc., a dental practice management company, and the assets of
Dental Delivery Services, P.C., a dental professional corporation, both located
in Houston, Texas. The purchase price of $2.5 million, including related
acquisition expenses, consisted of $2.2 million in cash and 23,342 shares of
Company common stock.

    In March 1998, the Company acquired an 80.0% interest in Castle Dental
Centers of California L.L.C. ("Castle West"), a company formed to acquire the
assets of Dental Consulting Services LLC ("DCS"), a dental practice management
company with headquarters in Los Angeles, California. The purchase price of
$18.1 million included cash of $10.8 million, $2.7 million in 8% subordinated
seller notes payable and an option granted to the sellers to convert a portion
of their ownership interests into 407,454 shares of Company common stock (the
"conversion right"). The conversion right may be exercised beginning twelve
months after the closing date. This convertible ownership interest has been
recorded at fair market value. The difference between the estimated fair value
of the convertible ownership interest at the acquisition date and the Company's
common stock into which it may be converted is being amortized over the period
to the earliest conversion date. In connection with these acquisitions, the
Company entered into management and consulting agreements with certain employees
and former owners of the businesses acquired and into long-term management
services agreements with each of the affiliated dental practices. In addition,
the former owners of DCS have the right to put all or a portion of their 20%
minority ownership in Castle West to the Company, beginning twenty-four months
after the closing date, for a combination of cash and common stock. In January
2000, the Company and the former owners of DCS entered into a settlement
agreement under which the Company acquired the 20% minority interest and the
conversion right. The total consideration paid by the Company was $5.3 million
of which $300,000 was paid in November 1999 as a deposit. The amount paid by the
Company will be accounted for as additional consideration at the date of the
settlement.

    In July 1998, the Company acquired all the outstanding capital stock of
Dentcor, Inc, a dental practice management company, located in Florida. The
purchase price of $1.0 million, including related acquisition expenses,
consisted of $800,000 in cash and 20,566 shares of Company common.

    In July 1998, the Company acquired 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"), all dental professional
associates, located in Sarasota, Florida. The purchase price of $2.6 million,
including related acquisition expenses, consisted of $2.1 million in cash,
$370,000 in 9% Subordinated Promissory Notes due July 9, 2001 and 15,424 shares
of Company common stock.

    In December 1998, the Company acquired 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, located in San
Antonio, Texas. The purchase price of $15.8 million, including related
acquisition expenses, consisted of $13.2 million in cash, $1.3 million in 6%
Subordinated Promissory Notes due December 30, 2001 and 125,000 shares of
Company common stock. In addition, the Company entered into non-competition
agreements with the shareholders' of DCA and DAI and paid $130,000 in connection
therewith in January 1999. As provided for in the Asset Purchase Agreement,
$430,000 was payable in December 1999 in connection with a guaranteed amount of
the 125,000 shares of Company common stock issued upon the close of the
acquisition. In January 2000, the Company paid the $430,000, which was accrued
at December 31, 1999 and recorded as a reduction of additional paid-in capital.

    In addition, during 1998, the Company acquired the assets and stock of four
additional dental practices. Three of the dental practices were located in
California and one was located in Texas. The aggregate purchase price of $1.7
million, including related acquisition expenses, consisted of $1.4 million in
cash, $229,000 in 8% and 8.5% Subordinated Promissory Notes due June 30, 2000
and October 1, 2001, respectively, and 3,635 shares of Company common stock.

    The purchase price allocations were originally calculated on a preliminary
basis, subject to adjustment should new or additional facts about the business
become known. During 1999, the purchase price allocations were adjusted by
approximately $667,000 to reflect additional information that became available
throughout

                                      F-11
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


the year.

    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,
                                                                              ------------------------------------------
                                                                                1997             1998             1999
                                                                              --------         --------         --------
                                                                                            (in thousands)

<S>                                                                           <C>              <C>                    <C>
Patient receivables, net ................................................     $    236         $  1,470         $   --
Unbilled patient receivables, net .......................................           37              188             --
Prepaid expenses and other current assets ...............................           31               92             --
Property and equipment, net .............................................          554            3,866             --
Other assets ............................................................            3               93             --
Management services agreements ..........................................        9,934           42,072              667
Accounts payable and accrued liabilities ................................         (452)          (2,019)            --
Deferred taxes ..........................................................         --             (3,149)            --
Long-term debt, assumed .................................................         (138)          (1,254)            --
Minority interest .......................................................         --             (4,305)            --
                                                                              --------         --------         --------
                                                                                10,205           37,054              667
Less: fair value of common stock issued and other equity instruments ....        3,241            1,698             --
Less: issuance of notes payable .........................................        1,449            4,538             --
Less: escrow deposit ....................................................          500             --               --
                                                                              --------         --------         --------
    Cash purchase price, net of cash acquired ...........................     $  5,015         $ 30,818         $    667
                                                                              ========         ========         ========
</TABLE>

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

                                                  YEAR ENDED DECEMBER 31,
                                                --------------------------
                                                  1997              1998
                                                --------          --------

Net patient revenues ....................       $ 63,414          $ 93,473
Net income (loss) .......................         (1,933)            3,918
Income (loss) per common share:
Basic ...................................          (0.42)             0.58
Diluted .................................          (0.41)             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 periods presented, or of future results of operations of
the combined companies.

                                      F-12
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


4.  LONG-TERM DEBT:

    Long-term debt consisted of the following:

                                                          DECEMBER 31,
                                                   -------------------------
                                                     1998              1999
                                                   -------           -------
                                                         (in thousands)

Revolving credit loans .....................       $39,400           $50,860
Subordinated Seller Notes ..................         5,442             4,393
Other notes payable ........................         1,364               935
                                                   -------           -------
    Total debt .............................        46,206            56,188
Less current portion .......................         1,795             2,192
                                                   -------           -------
    Long-term debt .........................       $44,411           $53,996
                                                   =======           =======

    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, 1999, $50.9
million was outstanding under the Credit Agreement and the average interest rate
on the Company's bank borrowings was 9.8%.

    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 (Note 15). In March 2000, the Company advised its lenders under the bank
credit facility 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. In addition, under the May 2000 amended Credit Agreement, capital
expenditures for 2000 are limited to no more than $3.5 million, acquisitions are
not permitted in 2000, and the payment of any litigation settlement is
restricted to no more than $100,000, without consent of the lenders. At
September 30, 1999, the Company received waivers concerning violations of
certain financial covenants under the Credit Agreement. At May 10, 2000,
borrowings under the Credit Agreement were $43.5 million and the average
interest rate had increased to 11.2%.

    In 1997, the Company retired approximately $23.9 million of long-term debt
with proceeds of an initial public offering. The retirement of debt consisted of
$10.4 million of senior subordinated notes, $9.1 million of Bank Credit Facility
debt and $4.4 million of promissory notes in connection with certain
acquisitions. In connection with the repayment of $9.5 million in 12% Senior
Subordinated Debt in September 1997, the Company recognized a $3.2 million
extraordinary loss associated with the early retirement of such debt.

    At December 31, 1999, approximately $484,000 (net of accumulated
amortization of approximately $238,000) of debt issuance costs had been
capitalized in connection with the issuance of the Credit Agreement.

                                      F-13
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


    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, 1999 were as follows (in thousands):

            2000.....................................      $ 2,192
            2001.....................................       13,081
            2002.....................................       40,915
                                                           -------
                                                           $56,188

5.  COMMITMENTS AND CONTINGENCIES:

    LEASE COMMITMENTS

    Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1999 (in thousands):

            2000.....................................      $ 5,163
            2001.....................................        4,526
            2002.....................................        3,755
            2003.....................................        3,110
            2004.....................................        2,251
            Thereafter...............................        3,884
                                                           -------
            Total minimum lease obligation...........      $22,689
                                                           =======

    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 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 for $1.4 million.

    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. The transaction was not completed because at least one of the
conditions required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations.

    The Company carries insurance with coverage 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.

                                      F-14
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


6.  INCOME TAXES

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

                                                           DECEMBER 31,
                                                    ------------------------
                                                      1998             1999
                                                    -------          -------
                                                         (in thousands)
Deferred tax assets:
    Net  operating loss carryforward .........      $   756          $   543
    Deferred compensation ....................          400              200
    Allowance for bad debts ..................        1,232            2,018
    Other ....................................           24              114
                                                    -------          -------
          Total deferred assets ..............        2,412            2,875
                                                    -------          -------
Deferred tax liabilities:
    Unbilled receivables .....................       (1,236)          (1,778)
    Loss of Subchapter S status ..............         (211)              (4)
    Management services agreement ............       (4,047)          (4,428)
    Property and equipment ...................         (400)          (1,057)
    Other ....................................         (110)             (16)
                                                    -------          -------
                                                     (6,004)          (7,283)
                                                    -------          -------
Net deferred tax liabilities .................       (3,592)          (4,408)
Less current portion .........................        1,809            2,488
                                                    -------          -------
    Non-current liabilities ..................      $(5,401)         $(6,896)
                                                    =======          =======

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

                                                    YEAR ENDED DECEMBER 31,
                                               --------------------------------
                                                 1997        1998         1999
                                               -------     -------      -------
                                                        (in thousands)
Current tax provision (benefit):
          Federal .........................    $     -     $   (70)     $    17
          State ...........................        100          (8)           2
                                               -------     -------      -------
               Total current ..............        100         (78)          19
                                               -------     -------      -------
Deferred tax provision (benefit):
          Federal .........................         90       1,403          730
          State ...........................         10         165           86
                                               -------     -------      -------
               Total deferred .............        100       1,568          816
                                               -------     -------      -------
Provision (benefit) for income taxes ......    $   200     $ 1,490      $   835
                                               =======     =======      =======

                                      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:

                                                   YEAR ENDED DECEMBER 31,
                                           -------------------------------------
                                             1997           1998           1999
                                           -------        -------        -------
                                                       (in thousands)

Tax at U.S. statutory rate (34%) ........  $   208        $ 1,726        $   691
State income taxes, net of federal tax ..       24            203             81
Nondeductible expenses and other ........      (32)            26             63
Change in estimate of net operating
   loss carryforward ....................     --             (465)          --
                                           -------        -------        -------
                                           $   200        $ 1,490        $   835
                                           =======        =======        =======

    At December 31, 1999, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $2.5 million,
expiring in 2016. The Company has not recorded a valuation allowance for the
potential inability to realize its net deferred tax assets because, after
consideration of the affiliated dental practices' historical operating results
and the Company's planned operations, management believes that it is more likely
than not that the Company will realize those assets.

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 930,100 and 100,000 options granted under the Employees' Plan and
the Directors' Plan, respectively, at December 31, 1999. 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, 1999 and the changes during the three-year period then ended:

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

Outstanding at January 1, 1997 ...........         91,750          $10.00
Granted ..................................        562,500           10.67
Excercised ...............................           --              --
Forfeited ................................        (20,000)          10.00
Expired ..................................           --              --
                                               ----------          ------
Outstanding at December 31, 1997 .........        634,250          $10.59
                                               ==========          ======
Excercisable at December 31, 1997 ........         14,350          $10.00
                                               ==========          ======

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
                                               ==========          ======

 Weighted-average fair value of options granted during the year:

1997 .....................................     $     5.06
1998 .....................................           2.85
1999 .....................................           1.58

    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 45.0% for 1997, 56.9% for 1998, and 67.9% for 1999;
risk-free interest rates are 5.9% for 1997, 4.7% for 1998 and 6.1% for 1999; 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, 1999:

                               OPTIONS OUTSTANDING          OPTIONS EXERCISABLE
                         -------------------------------  ----------------------
                           WEIGHTED   AVERAGE   WEIGHTED     NUMBER     WEIGHTED
                            NUMBER   REMAINING   AVERAGE  EXERCISABLE    AVERAGE
                         OUTSTANDING  CONTRACT  EXERCISE      AT        EXERCISE
RANGE OF EXERCISE PRICE  AT 12/31/99   LIFE       PRICE    12/31/99      PRICE
-----------------------  ----------- ---------  --------  -----------  ---------
$2.00 to $8.00 ........    499,650     9.25     $ 3.77      61,752      $ 5.00
$8.00 to $13.00 .......    530,450     7.65     $10.57      225,930     $10.53
                         ---------                        -----------
                         1,030,100     8.43     $ 7.27      287,682     $ 9.34
                         =========                        ===========

    Had the compensation cost for the Company's stock-based compensation plans
been determined using the fair value rather than the intrinsic value of the
options, the net loss and basic and diluted net loss per common share for 1997
would approximate $2.9 million or $0.71 per share; the Company's net income and
diluted net income per 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 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 numerators and denominators of the basic and diluted
per-share computations for net income follows:

                                                          DECEMBER 31,
                                              ----------------------------------
                                                1997          1998         1999
                                              -------       -------      -------
                                                        (in thousands)

Net income (loss) attributable to
   common stock (1) ....................      $(4,714)      $ 3,586      $ 1,196
Preferred stock accretion ..............        1,930          --           --
                                              -------       -------      -------
Net income (loss) ......................       (2,784)        3,586        1,196
Less extraordinary loss ................        3,195          --           --
                                              -------       -------      -------
Income before extraordinary loss .......      $   411       $ 3,586      $ 1,196
                                              =======       =======      =======
Shares (denominator)
     Shares - basic (2) ................        4,100         6,586        6,825
     Options and warrants ..............           32            22           25
                                              -------       -------      -------
     Shares - diluted ..................        4,132         6,608        6,850
                                              =======       =======      =======

    (1)  The effect of the preferred stock accretion is excluded from earnings
         per share. The preferred stock was converted to common stock at a
         nominal value and those common shares were included in the calculation
         of Basic shares outstanding for all periods.

    (2)  Includes the weighted average of 407,544 shares of common stock
         issuable upon the exercise of the conversion right.

    Options to purchase an aggregate 125,000 shares of common stock at exercise
prices of $13.00 per share were excluded from the calculation of diluted
earnings per share for 1997 because their effect would have been antidilutive.
The options, which expire in 2007, were still outstanding at December 31, 1997.
Options to purchase an aggregate 616,000 shares of common stock at exercise
prices of $10.00 to $13.00 per share were

                                      F-18
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


excluded from the calculation of diluted earnings per share for 1998 because
their effect would have been antidilutive. The options, which expire in 2007,
were still outstanding at December 31, 1998. 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. The options, 588,300 expiring
2007 and 15,700 expiring 2009, were still outstanding at December 31, 1999.

    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 1997, 1998, and
1999 because its effect would have been antidilutive. The warrant, which expires
in December 2000, was still outstanding at December 31, 1999.


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 1997, 1998, or 1999.

10. SUPPLEMENTAL CASH FLOW INFORMATION:

                                                             DECEMBER 31,
                                                      --------------------------
                                                       1997      1998      1999
                                                      ------    ------    ------
                                                            (in thousands)
Cash paid during the period for:
   Interest ......................................    $1,707    $1,803    $3,997
   Income taxes ..................................        44       222       595
Supplemental disclosure of noncash
   investing and financing activities:
   Acquisition stock guarantee payment accrual ...      --        --         430
   Issuance of notes payable for accrued
      interest and purchase of property
      and equipment ..............................       450      --        --
   Issuance of capital lease obligation
      for property and equipment .................       416      --        --
   Issuance of Series B Preferred Stock
      in connection with an acquisition ..........     1,550      --        --
   Issuance of Preferred Stock in connection
      with related party financing ...............     1,144      --        --
   Conversion to common stock of Series A
      and Series C Preferred Stock ...............     5,898      --        --
   Conversion of Series B Preferred Stock
      to subordinated notes ......................      --       1,550      --

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

                                      F-19
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


such accounts.

    FAIR VALUE OF 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, 1998 and 1999, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.

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, 1999, there was $526,000 payable to the
shareholder under the terms of the deferred compensation agreement.

    At December 31, 1998 and 1999, three executive officers of the Company had
outstanding loans in the aggregate amount of $339,000 and $307,000 from the
Company. These loans are repayable over varying periods ranging from one to five
years and bear interest at rates ranging from zero to six percent.

    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 1997 and 1999.

    A director of the Company is a Managing Director of Pecks Management
Partners Ltd., the investment advisor to investors in the Company owning an
aggregate of 913,243 shares of Company common stock. Pursuant to the provisions
of the Securities Purchase Agreement dated December 18, 1995, 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 and chief executive officer (the "Affiliate").
The Company has agreed to pay the Affiliate a minimum guaranteed rental of
$12,000 per month through January 2001 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 1997, 1998 and 1999.

                                      F-20
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


13. QUARTERLY FINANCIAL DATA (UNAUDITED):

                                     FIRST      SECOND       THIRD      FOURTH
                                   --------    --------    --------    --------
                                       (in thousands, except per share data)

 1998
    Net patient revenues ......    $ 14,541    $ 19,679    $ 20,175    $ 20,427
    Operating income ..........       1,076       1,713       1,973       2,146
    Net income ................         662         781       1,021       1,122
    Basic and diluted
       earnings per share (1) .    $   0.11    $   0.12    $   0.15    $   0.17

 1999
    Net patient revenues ......    $ 25,167    $ 25,661    $ 26,092    $ 25,781
    Operating income ..........       2,639       2,565       2,033         414
    Net income (loss) .........       1,003         107         507        (421)
    Basic and diluted
       earnings per share (1) .    $   0.15    $   0.02    $   0.07    $  (0.06)

    (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.

   The Company has restated its previously issued financial statements on Form
10-Q for the third quarter of 1999. The restatement is attributable to an
increase in the Company's bad debt expense and allowance for doubtful accounts,
and capitalization of interest on construction of dental centers. The net impact
of these adjustments on the third quarter of 1999 is as follows:

                                                   PREVIOUSLY
                                                    REPORTED         RESTATED
                                                   ----------       ----------
                                                          (in thousands)

Net patient revenues .........................       $26,092          $26,092
Operating income .............................         2,625            2,033
Net income ...................................           856              507
Basic and diluted earnings
   per share .................................       $  0.13          $  0.07

                                      F-21
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


14. 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, 1997, 1998 and 1999 is as follows:

                                                 YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                             1997          1998          1999
                                          ---------     ---------     ---------
                                                      (in thousands)
Net patient revenues:
       Texas .........................    $  29,631     $  47,464     $  68,362
       Florida .......................        9,650        11,951        12,142
       Tennessee .....................        6,944         7,853        10,236
       California ....................         --           7,555        11,961
                                          ---------     ---------     ---------
      Total revenue ..................       46,225        74,823       102,701
                                          ---------     ---------     ---------

Operating expenses:
       Texas .........................    $  25,460     $  39,865     $  59,406
       Florida .......................        8,708        10,351        11,607
       Tennessee .....................        6,552         7,419         9,276
       California ....................         --           6,289        10,387
      Corporate, general and
         administrative expenses .....        2,186         3,991         4,374
                                          ---------     ---------     ---------
      Total operating expenses .......       42,906        67,915        95,050
                                          ---------     ---------     ---------

Operating income (loss):
       Texas .........................        4,171         7,599         8,956
       Florida .......................          942         1,600           535
       Tennessee .....................          392           434           960
       California ....................         --           1,266         1,574
      Corporate, general and
         administrative expenses .....       (2,186)       (3,991)       (4,374)
                                          ---------     ---------     ---------
           Total operating income ....        3,319         6,908         7,651
Litigation settlement ................         --            --           1,366
Interest expense .....................        2,792         1,889         4,220
Other (income) expense ...............          (84)          (57)           34
                                          ---------     ---------     ---------
Income (loss) before income
   taxes and extraordinary loss ......    $     611     $   5,076     $   2,031
                                          =========     =========     =========

Assets:
       Texas .......................................     $ 37,953      $ 32,201
       Florida .....................................       12,203        11,928
       Tennessee ...................................        6,276         9,320
       California ..................................       20,259        22,302
                                                         --------      --------
           Total assets for
              reportable segments ..................       76,691        75,751
       Other unallocated amounts ...................       23,344        39,231
                                                         --------      --------
           Total assets ............................     $100,035      $114,982
                                                         ========      ========

                                      F-22
<PAGE>
                           CASTLE DENTAL CENTERS, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


15. SUBSEQUENT EVENTS

   In January 2000, the Company amended its 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.

    In January 2000, the Company paid $5.0 million to the former owners of DCS
as consideration for entering into a settlement agreement. Under the terms of
the settlement agreement, the Company acquired the 20% minority interest and the
conversion right held by the former owners of DCS (Note 3).

    In January 2000, the Company paid the former owners of DCA and DCI
approximately $430,000 pursuant to the terms of the Asset Purchase Agreement
(Note 3).

                                      F-23
<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 26, 2000

                                       S-1
<PAGE>
                          CASTLE DENTAL CENTERS, INC.

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


<TABLE>
<CAPTION>
PATIENT RECEIVABLES:                                       BALANCE                                                         BALANCE
                                                          BEGINNING      CHARGED TO                                        AT END
                                                           OF YEAR        EXPENSES      DEDUCTIONS      OTHER(1)           OF YEAR
                                                           -------        -------        -------        -------            -------
<S>                                                        <C>            <C>            <C>            <C>                <C>
Year ended December 31, 1997:
  Allowance for uncollectible accounts -
    patient receivables ...........................        $ 2,425        $ 1,698        $   451        $   257(1)         $ 3,929
                                                           =======        =======        =======        =======            =======

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
                                                           =======        =======        =======        =======            =======


                                                           BALANCE                                                         BALANCE
UNBILLED PATIENT RECEIVABLES                              BEGINNING      CHARGED TO                                        AT END
                                                           OF YEAR        EXPENSES      DEDUCTIONS      OTHER(1)           OF YEAR
                                                           -------        -------        -------        -------            -------

Year ended December 31, 1997:
  Allowance for uncollectible accounts -
    unbilled patient receivables ..................        $   361        $   199        $  --          $     8            $   568
                                                           =======        =======        =======        =======            =======

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
                                                           =======        =======        =======        =======            =======
</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>
   (a)(3) EXHIBITS

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

      *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.

       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.

     *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.
<PAGE>
     *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.
<PAGE>
                  (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 31, 2000, by and among Castle Dental
                  Centers, Inc., Bank of America, N.A., as agent, and the
                  lenders thereunder.

      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.

      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.

      10.24  --   Form of Subordinated Note issued pursuant to Senior
                  Subordinated Note Purchase Agreement dated January 31, 2000.

      10.25  --   Form of Convertible Subordinated Note issued pursuant to
                  Senior Subordinated Note Purchase Agreement dated January 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.

      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.

      21     --   Subsidiaries of the Registrant.

      27.1   --   Financial Data Schedule as of December 31, 1999.

   -------------
   *  Incorporated herein by reference to the Company's Registration Statement
      on Form S-1 (registration number 333-1335)
<PAGE>